One important trend has emerged this year. That means this year’s biggest winners are overseas.
Emerging country stocks represented by iShares MSCI Emerging Markets ETF (EEM) While all non-U.S. stocks are up more than 7% this year, iShares MSCI ACWI ex US ETF (ACWX) Earning more than 5% profit. In comparison, the U.S. market has lagged, with the S&P 500 index in negative territory since the beginning of the year. The overall market index fell 0.3%.
This relationship is at odds with the past decade, when near-zero interest rates in the United States strengthened the country’s renowned technology leadership, while a strong dollar and low commodity prices hindered growth in overseas markets.
For a myriad of reasons, many investors are now hedging their exposure to the United States in favor of other opportunities overseas. The dollar has weakened due to concerns about the widening US budget deficit, rising commodity prices due to heightened geopolitical uncertainty, and concerns about the risk of AI concentration in the US market.
To be sure, the US war with Iran complicates the situation. Emerging markets sold off this week on concerns that disruptions at Iran’s refineries and the transit of crude oil through the Strait of Hormuz will hurt the economies of countries most vulnerable to rising energy prices.
South Korea, one of the year’s biggest momentum traders, was one of the hardest hit countries given its manufacturing economy is the biggest destination for crude oil passing through the Strait of Hormuz. of iShares MSCI Korea ETF (EWY) It has fallen 11% this week alone. The Kospi index plunged more than 12% on Wednesday, its worst single-day decline on record.
Nevertheless, the dispute has had little impact on the long-term theme of international equities, which remains a positive outlook for investors.
“What’s happening in Iran and Israel could have a near-term negative impact on international equities if it lingers for several weeks,” said Stephen Colano, head of investments at Integrated Partners. “But I think the longer-term secular theory and trends still hold. If anything, they’ll probably accelerate.”
a unique story
There are other reasons to invest abroad besides a desire to reduce exposure to the United States, as foreign markets have never been more attractive.
Europe’s STOXX Europe 600 index will increase by more than 3% in 2026. Anger is rising between the United States and the European Union, with the latter doubling down on fiscal stimulus, beefing up its defense industry and striking trade deals with other countries. South Korea’s Kospi has increased by 18% this year. The index is dominated by memory giant Samsung Electronics, which has risen 34% since the beginning of the year, and SK Hynix, which has risen 25%. Despite recent market hits, the outlook for these companies remains intact as investors seek exposure to AI. Japan’s Nikkei average has risen more than 4% since the beginning of the year. Optimism has grown domestically over the past few years as Japan pushes ahead with corporate governance reforms, but this year the threshold rose to a record high following Prime Minister Sanae Takaichi’s victory. He is expected to introduce further expansionary policies.
Rise of US isolationism
Of course, many investors expect the U.S. market and economy to remain exceptional, even with some changes, given the dollar’s dominance around the world and the strength of tech companies.
“I think the U.S. will remain the market with the most innovative and most dominant companies until further notice,” said John Belton, portfolio manager of the Gabelli Global Growth Fund (GGGAX) at Gabelli Funds. “I don’t think anything has changed about that.”
But some stories are becoming more persuasive, especially as America’s increasingly protectionist stance begins to change its behavior abroad, particularly in Europe, where it has lost trust with the United States and increased defense spending.
Indeed, the Iran conflict may highlight the need for countries to start building their own infrastructure and resources rather than relying so much on trade with other countries. For example, earlier this year, Europe signed its largest ever trade deal with India, eliminating 90% of tariffs to boost trade.
“While I think this activity may hinder economic growth in the short term, it further highlights the need for countries to make these investments to reduce their dependence on cross-border capital flows should geopolitical tensions persist,” Collano said.
Other concerns remain. For example, if a spike in budget deficits or a threat to the Federal Reserve’s independence causes the dollar to weaken or if investors become overly complacent, “Sell America” could gain momentum.
What is clear, at least on the periphery, is that America’s dominance is not what it once was.
