Are International Stocks Finally Ready to Shine?

Chart of the Month
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®
Globe of the world

Photo Credit: Kyle Glenn, Unsplash

Over the past decade, U.S. investors benefitted significantly by investing at home rather than abroad, as U.S. stocks outperformed their international counterparts significantly. As illustrated in the chart below, an initial investment of $1,000 in the S&P 500 at the end of 2012 grew to $2,613, excluding dividends, by the end of 2022. For comparison, the same $1,000 investment in the MSCI Developed Market Index returned only $1,142, while a $1,000 investment in the MSCI Emerging Market Index posted a loss and returned $842.

Regional Stock Market Returns Over Past 10 Years

Regional Stock Market Returns Over Past 10 Years

Looking back at the last decade, investment analysts attribute the outperformance of U.S. stocks to several factors. One major contributing factor is the composition of the S&P 500 Index, which is heavily weighted towards technology and other growth-oriented stocks such as Apple, Amazon, Microsoft, Google, and Tesla. This high concentration of technology stocks is not found anywhere else around the world, and as the group outperformed, so did the broader U.S. stock market. Also, the U.S. dollar has increased by about 30% in the last ten years, making foreign investments worth less when converted back to U.S. dollars. These two catalysts benefitted U.S. stocks while acting as a headwind for international stocks.

Today, international stocks trade at more attractive valuations than U.S. stocks after a decade of underperformance. As illustrated in the chart below, U.S. stocks trade at a higher next 12-month price-to-earnings multiple than international stocks. In addition, U.S. stocks trade more expensively against their historical valuation range, as evidenced by the 10th to 90th percentile range of historical price-to-earnings multiples. Given the current valuation backdrop, growth stocks’ underperformance in 2022, and recent U.S. dollar weakness, international stocks may become more of a focus for investors in 2023.

Current and Historical Next 12-Month Price to Earnings

Current and Historical Next !2-Month Price to Earnings

Important Disclosures

Index performance is for illustrative purposes only and does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not ensure future results. Index performance does not represent actual fund performance.

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Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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