The U.S. has been lagging Europe and China in recent months.
It seems “America First” doesn’t apply to the financial markets these days, as several foreign equity markets are beating U.S. stocks by wide margins so far this year.
Example: European large-cap and mid-cap stocks have had their best start to a calendar year, relative to U.S. shares, since 2002—with the MSCI European Economic and Monetary Union (EMU) index outpacing the S&P 500 by 9.5 percentage points year to date.*
Likewise, Chinese large-cap stocks have also had their best start to the year since 2002. As seen in the chart below, the FTSE China 50 index’s year-to-date return is 16 percentage points higher than that of the S&P 500.*
Reasons for overseas markets’ strong recent showing include relatively attractive valuations, the emergence of competitive Chinese AI technology, and progress toward ending the Russia-Ukraine war.
Excess Returns of Chinese Large-Cap Stocks Versus U.S. Large-Cap Stocks
(YTD through 2/21 of each calendar year)
Source: Bloomberg, calculations by Horizon Investments, data as of 02/21/2025. Past performance is not indicative of future results. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an unmanaged index.
If this type of international outperformance rings a bell, it should. In 2017—the first year of President Trump’s first term in office—Chinese large-cap stocks returned 36%, versus 22% for the S&P 500. European stocks also outpaced the S&P 500.
Of course, we can’t know whether this first year of Trump’s second term will see history repeat itself. Uncertainties around tariffs persist in both Europe and Asia. While predicting the ultimate outcomes is nearly impossible, foreign markets’ recent returns are a clear reminder of the potential benefits of global diversification in investment portfolios.
The upshot: International allocations that sometimes dampen performance when the U.S. leads the pack can help stabilize portfolio returns in more balanced market environments.
