Why It’s Not Too Late to Add International Exposure

After spending most of the past 10-15 years wandering in the wilderness, international stocks have finally found their footing this year. For the year to date through July 2, 2025, the Morningstar Global Markets ex-US Index has gained 18.1%, compared with 6.4% for the Morningstar US Market Index.

What’s been driving this enthusiasm? For one, non-US stocks headed into the year with lower valuations than their domestic counterparts. They also attracted more investor attention as investors lost confidence in the mega-cap tech stocks that previously dominated returns in the US market. The dollar’s weakness has also been a significant driver, as it makes returns for stocks in local currencies outside the United States worth more when converted back into dollars.

Despite the wide performance gap between US and non-US stocks this year, though, I’d argue that it’s not too late to benefit from international diversification. In this article, I’ll explain why.

Long-Term Performance Cycles

Over time, international stocks have gone through multiyear periods when they either outperform or underperform the United States, partly because of differences in economic growth, currency trends, and valuation shifts. As shown in the chart below, for example, international stocks pulled ahead in the late 1970s, mid- to late-1980s, and 2002 through 2007.

More recently, they fell behind by a wide margin over most of the 15-year period following the global financial crisis. That was driven by both strong earnings growth and multiple expansion for US stocks.

There have been some brief reprieves. For example, non-US stocks fared slightly better than their US counterparts during the 2022 bear market. However, they fell behind again as the US market bounced back in 2023 and 2024.

Portfolio Perspectives

Another reason investors might want to shore up their international exposure: They might still be underweight even after this year’s runup. An investor who started out with a balanced portfolio mix of about two-thirds US stocks and one-third international issues five years ago, for example, would now hold about 71% in US stocks if she didn’t do any rebalancing along the way. Morningstar’s data on fund assets bears out the notion that many investors may be a bit underweight in international stocks. As of May 30, for example, assets in international funds totaled about $4.6 trillion, which is about 26% of the total in US funds and exchange-traded funds (including sector funds). A more balanced weighting would be 62.3% in the United States and 37.7% in international stocks. Those are the current weightings based on the market capitalizations of US and foreign stocks.

Valuation Matters

Moreover, the price tags on international stocks still look more attractive. I looked at a variety of valuation metrics for both US stocks and their international counterparts and then compared the current levels with longer-term averages. As shown in the table below, valuation levels for both US and non-US stocks are trading at a premium to past levels based on most valuation metrics, but US stocks are trading at loftier levels based on most measures.

The CAPE, or Shiller P/E, ratio, which divides a stock’s price by an average of real earnings over the past 10 years, tells a similar story. As I did in the analysis above, I looked at the current CAPE ratio for each market and divided that number by the average historical level. The CAPE ratio for the US market currently stands at about 33.9, compared with a longer-term average of 24.8. In other words, it’s currently trading at a 37% premium to past CAPE levels. As shown in the chart below, this premium is higher than any other major equity market except India.

While the US market is trading at a steep premium compared with past levels, many smaller equity markets are trading at lower CAPE ratios than they have in the past.

To be sure, elevated CAPE valuations alone don’t guarantee that the US market will underperform going forward. But they do add an additional level of risk.

Tailwinds From the Declining Dollar

The dollar’s recent slump is another argument in favor of international diversification. For the year to date through July 2, the dollar has dropped about 11%. As I mentioned above, that’s been a significant driver behind international stocks’ reversal of fortune. There’s no guarantee that the negative price trend in the dollar will continue, but there are some plausible reasons to believe it might. Central banks around the world have been “de-dollarizing” their reserves by purchasing both gold and other currencies. The rising federal deficit, which is set to increase by more than $3 trillion with the newly signed budget bill, could also weaken investor confidence and further decrease demand for dollar-based assets. A potential rate cut by the US Federal Reserve later this year would be another factor depressing demand for dollar-based assets.

Diversification Benefits

We’ve written previously about why international stocks haven’t been adding as much diversification value as they did in the past. Over the past several decades, correlations between US and non-US stocks have mostly been climbing higher. However, international stocks have shown some signs of decoupling from domestic markets more recently. For the trailing three-year period through June 30, 2025, the Morningstar Global Markets ex-US Index benchmark has had a correlation coefficient of 0.86 when measured against the US market. That’s down from as high as 0.94 in the past. Emerging markets can be particularly valuable from a diversification perspective.

Final Thoughts

Ultimately, I’d argue that portfolio diversification is the best reason to make sure you have enough exposure to non-US assets. It’s impossible to know if international stocks will lead or lag over any given period, but a healthy dose of international exposure can help insure you’re not overly exposed to trends in the US market.