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On a relative price-to-earnings basis, developed international stocks have reached a multidecade extreme. That bodes well for future returns.

International stock significantly undervalued chart

Over the past decade, U.S. equities have broadly outperformed international stocks by a considerable margin. However, that hasn’t always been the case historically. Periods of relative outperformance for either U.S. or foreign equities have tended to be cyclical in nature. The past decade of dominance for the United States has been exceptionally long and atypical. The question for many investors is, what will cause international equities to take the lead again?

Strong earnings growth outside the United States coupled with more-attractive valuations, could support international stock market outperformance going forward, narrowing the valuation gap between U.S. and non-U.S. equities. As illustrated in the chart above, the MSCI EAFE is currently trading at an approximately 30% discount to the MSCI USA on a forward price-to-earnings basis — a historically noteworthy discount that’s more than double the average of about 12% since 2005.

Although the expansion began in the United States last summer, the recovery has been delayed to varying degrees in other countries. While we recognize that valuation discrepancies are not useful in pinpointing turning points in sectoral or geographic leadership, the long-term relationship between domestic and international equity markets increasingly points to an already attractive opportunity for foreign stocks becoming even more so.

The bottom line? International equity markets have been attractively priced for some time. Expectations for strong global growth, improving fundamentals, and increasingly attractive valuations have only enhanced that positive outlook.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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