Beyond U.S. borders: International equities gain momentum as diversification delivers

The latest: The U.S. Supreme Court and tariffs

The Supreme Court’s decision to invalidate the administration’s broad “reciprocal” tariffs removes an important source of immediate trade pressure, but it does not mark an end to tariff risk.

The administration’s swift pivot to a temporary 15% global tariff under Section 122—alongside plans to initiate Section 301 investigations—keeps trade policy uncertainty elevated, even if future measures are likely to be narrower and more procedural than before.

For investors, this suggests continued headline volatility for trade-exposed sectors and multinational margins, modest upside risks to goods inflation at the margin, and a reinforcing case for global diversification as portfolios navigate a more fragmented and less predictable U.S. trade backdrop.

The broadening trade

We remain bullish on U.S. markets, largely based on the earnings trends.

While U.S. earnings growth expectations remain robust, global equity market leadership has broadened, with performance increasingly shared across cyclicals, small/mid-caps, and international markets.

A closer look at international equities

International stocks offer diversification, possibly at an opportune time. The broadening we see is not just performance-based. We’re seeing stronger earnings growth in all major global regions. Typically, this has favored non‑U.S. equities, particularly when paired with a softer dollar and easing financial conditions abroad, which is the case in early 2026.

We believe the combination of policy divergence, improving regional fundamentals, and shifting investor preferences is reinforcing the case for global diversification. This is happening as pockets of U.S. equity leadership tied to artificial intelligence (AI) face near‑term scrutiny.

To be clear, tariffs and potential AI growing pains are not the reasons to consider an allocation to international stocks. It’s this: The benchmark MSCI AC World ex USA offers a different set of quality companies and most of the earnings growth of the S&P 500, but at a 30% valuation discount, and almost two-thirds less concentration risk. (Exhibit 1).

Market concentration on its own has not been a worrisome issue (see ”Navigating a concentrated equity market”). That said, international investing adds access to a different set of AI investments that may be underappreciated.

Why it matters

International equities do not need to dominate portfolios, but we believe they warrant a strategic role within a well-diversified equity framework, especially as U.S. concentration risk has reentered the conversation. International exposure can complement U.S. holdings, helping to mitigate concentration and broaden sources of return.

What we’re watching

U.S. equities have pulled back recently, led by weakness in the Magnificent 7, as investors reassess valuations and competitive dynamics amid rising concerns around AI disruption and returns on capital.

On the other hand, international stocks outperformed U.S. stocks in 2025 and have extended that lead year-to-date in 2026. This has been driven by strength in Japan, Asia ex Japan, and Latin America—where improving earnings momentum, corporate reforms, and more supportive policy backdrops have underpinned broader, less concentrated market leadership.

• Japan: Corporate governance reforms continue to drive higher return on equity, improved capital discipline, and sustained earnings momentum, supporting durable relative outperformance.
• Asia ex Japan (notably Korea): Shareholder-friendly reforms and structural exposure to AI and defense investment have reinforced performance and broadened leadership beyond technology mega-caps.
• Latin America: Earlier easing cycles, commodity leverage, and improving macro stability have supported earnings growth and attracted incremental global capital.

Sources of momentum

• Policy divergence and earlier easing cycles: Many non-U.S. central banks—particularly in emerging markets—are further along in easing cycles, supporting domestic demand and financial conditions relative to the United States.
• Shareholder-friendly behavior outside the United States: International companies are increasingly emphasizing capital discipline through dividends, buybacks, and improved governance, narrowing a long-standing gap versus U.S. peers.
• Broader market leadership: International indices offer greater exposure to cyclicals, financials, and industrials, which tend to benefit as global growth stabilizes and leadership widens beyond technology.
• Weaker U.S. dollar: Currency trends have supported USD-based returns and lifted reported revenues and earnings for non-U.S. companies.

Implications for portfolios

Active investing works in international—here’s what we found:

• Fidelity research shows that active managers have outperformed their benchmarks across most major international equity categories over time, reflecting the structural inefficiencies of non U.S. markets. (Historical research current as of June 2025; see linked article below.)
• Greater dispersion driven by local regulation, governance standards, currency dynamics, and geopolitical risk creates opportunities for skilled active managers to add value through security selection and risk management.
• We outlined additional thoughts in a paper titled “Why active investing works in international equities.”