These 3 Tailwinds Could Make International Stocks Fly for Years. Should You Buy Them?
For a very long stretch, owning an index fund tracking anything other than U.S. tech stocks often felt like risking a slow tax on your portfolio. Then, 2025 broke the pattern. The iShares Core MSCI Total International Stock ETF (IXUS +0.56%) is up by 29% in the past 12 months, well ahead of U.S. market benchmarks like the S&P 500 (^GSPC +1.18%), which rose by 22%.
The question is whether that reversal of the normal state of affairs was a fluke, or whether it was the front edge of a trend. There are three tailwinds in particular that could imply the latter.
Image source: Getty Images.
1. A valuation gap this wide could eventually close
International stocks are cheap, and U.S. stocks are expensive, which will eventually incentivize some capital to shift from U.S. to international stocks.
The MSCI Total International Stock ETF trades at a price-to-earnings (P/E) multiple of just under 18 at recent levels, whereas the S&P 500’s P/E is around 26.5. Importantly, the top 10 S&P 500 companies account for about 38% of that index and are concentrated in megacap tech businesses, whereas the top 10 in the MSCI index account for 14% and aren’t as concentrated.
iShares Trust – iShares Core Msci Total International Stock ETF
Today’s Change
(0.56%) $0.53
Current Price
$94.79
Key Data Points
Day’s Range
$93.55 – $94.84
52wk Range
$75.96 – $97.93
Volume
1.8M
But cheap stocks can easily stay cheap, and for the most part, international stocks have looked cheap for most of the past decade, and ultimately, stayed cheap. And given that they’re cheap — and that their track record of performance is somewhat spotty — it now makes sense for most investors to have an allocation to international stocks in their portfolios.
2. The valuation changes from AI favor the cheaper market too
The S&P 500’s overall price-to-earnings (P/E) ratio of 26.5 is misleading on its own.
Roughly a third of the index by weight is concentrated in seven companies with AI-related narratives that trade near 28 times their forward earnings; that small cluster generates most of the index’s recent earnings growth. That’s the AI premium, and it’s currently priced into valuations.
International stocks do not have that same premium. The core MSCI total international stock index is priced at 14.6 times forward earnings, which doesn’t scream “overvalued” nearly as much as the U.S. indexes do.
Today’s Change
(1.18%) $86.41
Current Price
$7440.43
Key Data Points
Day’s Range
$7348.88 – $7444.32
52wk Range
$6177.97 – $7620.90
Volume
3.7B
The math is illustrative here. A move in a stock’s P/E from 10 to 12 times forward earnings is a gain of about 20% in the stock’s price, assuming earnings stay constant; the same 2-point expansion from 22 to 24 times forward earnings delivers only about a 10% gain.
The takeaway is thus that for international businesses to deliver strong returns from their use of AI, they mostly just need the valuation discount that they currently trade at to stop widening, and then capital may be incentivized to flock to them rather than to overvalued stocks in the U.S. Of course, AI productivity gains must translate into actual earnings expansion, and then the market has to eventually notice the change and subsequently rerate those valuations upward for this trend to play out.
3. China’s regulatory regime is maturing quickly
If you’ve avoided certain large emerging markets since late 2020, when China’s crackdown against players like Alibaba dented its share price badly, you aren’t alone.
That instinct paid for years; it simply didn’t make much sense to invest in companies based in jurisdictions with policies that were often less than friendly to foreign shareholders. But things are changing now, and this could make stocks issued by Chinese businesses meaningfully more appealing than in the past, which could subsequently help attract capital that would otherwise go toward U.S. stocks.
In October 2025, China’s Securities Regulatory Commission unveiled a two-year plan to refine the Qualified Foreign Institutional Investor regime, promising greater transparency for foreign capital, and the 2026 agenda doubles down on providing information on dividends and buybacks, not to mention tougher fraud penalties. There’s going to be a lot more clarity about how regulators act and why, as well as more protections for investors.
None of that erases political risk, of course. Nonetheless, the trajectory is (slowly) bending toward a recognizable form of shareholder-oriented governance practices. Soon enough, that’ll attract investors — and positioning some of your investments ahead of that happening, while quite risky, is probably still a decent idea.
