One Year In: The global thesis in review

In early 2025, we re-introduced developed international equities across client portfolios for the first time since the inception of many of these accounts. For anyone who had watched U.S. stocks trounce the rest of the world from 2010 through 2024, it was easy to forget how global markets could present useful growth and diversification opportunities for investment allocations. But the data at the time demanded a fresh look.

Fifteen months later: MSCI EAFE returned 27.9% in 2025, its strongest year since 2003, and beat the S&P 500 by 11.5%—the widest relative advantage since 1993. Emerging markets did even better, up 33.6%. Through the first sixteen weeks of 2026, that leadership has continued.

I want to spend the rest of this note explaining why—and, more importantly, why I think the thesis has gotten stronger, not weaker.

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Why we sat out, and why we finally moved

For most of the last fifteen years, we ran client portfolios with a deliberate home bias. That wasn’t an oversight. U.S. technology leadership was real, the dollar was strengthening, and international economies were growing more slowly. The academic argument for a market-cap-weighted global portfolio was intellectually tidy. The data said the tidy answer was losing money.

Plenty of our peers held at least an underweight in international throughout that stretch, citing cheap valuations. The valuations were cheap. They stayed cheap. “Cheap” alone is not a thesis—it’s a condition. What we were waiting for was a reason: specific, identifiable catalysts that would convert the valuation gap from a long-standing discount into an actual return driver.

By early 2025, those catalysts had arrived. Four of them, in particular.

What actually drove the 2025 move

The dollar cracked. The DXY fell 10.7% in the first half of 2025, its worst H1 in more than fifty years, and finished the year down roughly 9%. This matters because for a U.S. investor holding unhedged international equities, a weaker dollar translates foreign-currency gains into larger dollar-denominated returns. Roughly half of the MSCI EAFE return in 2025 came from the currency tailwind alone.

Europe stopped apologizing for its balance sheet. In March 2025, Germany amended its constitution to allow unlimited debt financing for defense spending above 1% of GDP and authorized a €500 billion infrastructure fund. German defense spending alone is projected to rise from €86 billion in 2025 to €152 billion by 2029. At the June 2025 NATO summit, allies committed to 5% of GDP on defense by 2035. This is the largest peacetime fiscal pivot in Europe’s postwar history—and it is only beginning to flow through to earnings in defense, industrials, infrastructure, and financials.

Japan’s governance reforms finally started biting. Since 2022, the Tokyo Stock Exchange has been pressuring listed companies to manage for cost of capital and shareholder returns. The results are showing up in the data: average price-to-book ratios have risen from 1.1 to 1.4, return on equity has climbed from 8.4% to 9.0%, and Japan’s three largest insurers have committed to unwind their cross-shareholdings entirely. These are structural changes. They don’t reverse in a quarter.

Latin America caught a commodity tailwind. Brazilian and Mexican equities, underpinned by a 25% regional return through mid-2025, benefited from firmer commodity prices and strengthening local currencies against the dollar. Morningstar’s Emerging Markets Americas Index ran ahead of broader EM for most of the year.

And threaded through all of it: AI-related capital expenditure that is not confined to the S&P 500. European semiconductor equipment, Japanese industrial automation, Taiwanese and Korean chip supply chains—these are beneficiaries of the same spending cycle powering the Magnificent Seven. We stopped pretending the AI story was a U.S.-only story.

Why the case has gotten stronger, not weaker

The natural instinct after a run like 2025 is to assume the window has closed. I don’t think it has—and the reason is valuation.

Even after the year international just had, the MSCI ACWI ex-US still trades at roughly a 35% forward P/E discount to the S&P 500. That is not a minor gap. The S&P 500’s own forward P/E is sitting near levels last seen before 2000. Meanwhile, global earnings estimates have been revised upward, with emerging markets seeing the largest upgrades. The combination of cheaper starting valuations and positive earnings revisions is a setup that historically produces durable, not transient, outperformance.

None of this means international equities are going to repeat 2025 in 2026. It means the runway is still long, and the margin of safety is still intact.

The knife’s edge: currency

I want to be direct about the main risk to this thesis, because it deserves more than a footnote.

Currency is doing heavy lifting in the international story, and it cuts both ways. If the dollar keeps drifting lower—or the euro, yen, and real keep strengthening—unhedged international exposure will continue to benefit. If the dollar round-trips, a meaningful slice of 2025’s gains comes back out of client portfolios. The economic case for continued dollar weakness is real: slower U.S. growth, wider deficits, and shifting global capital flows are structural, not temporary. But “structural” does not mean “monotonic.” Currencies do not move in straight lines.

We are watching this closely, and it shapes how we think about hedged versus unhedged exposure within the international allocation.

The Iran complication

The second complication is the war in Iran. Since March, Brent crude has swung between $120 and $91, driven by alternating shocks and de-escalations around the Strait of Hormuz. The IEA called the March disruption the largest single-month supply shock in history. Energy-importing economies—Japan and Europe, in particular—feel that pressure first.

Here’s what I can tell you about how we’re reading it. Through April, despite elevated energy costs, global earnings estimates have continued to be revised upward. Markets have been remarkably orderly about pricing the uncertainty. If the conflict de-escalates and energy prices normalize, the earnings momentum should carry. If it escalates further—or if the Hormuz situation becomes a durable feature rather than a recurring flashpoint—the international thesis takes a hit, particularly in energy-importing markets. We are not ignoring this. We are not panicking about it either.

Why active matters more here

A word on implementation. EdgeRock’s international allocation is actively managed, and I want to explain why.

Start with the data: Over the ten years through 2025, only 24% of active international stock funds beat their passive benchmarks—a low bar, but much higher than the 15% success rate for active U.S. equity funds. In 2025 specifically, active international strategies hit rates ran 52%; in diversified emerging markets, active success jumped to 64%. International is the segment where active management still has a reasonable chance of earning its fee.

The reason is structural. International markets are less efficient than the U.S., with wider dispersion in governance, capital allocation discipline, and analyst coverage. A Japan TSE reform leader is a very different investment than a Japan TSE reform laggard—and passive indexing owns both equally. Many large international companies operate under governance frameworks that do not consistently prioritize shareholders. An experienced manager can pick sides. An index cannot.

Strategy, not scoreboard

The temptation after a year like 2025 is to confuse a scoreboard with a strategy. The scoreboard can turn. Strategies should not.

What we did in early 2025 was a structural repositioning grounded in specific, identifiable catalysts: a dollar top, a European fiscal pivot, a Japanese governance inflection, and a global AI capex cycle that was never going to stay confined to seven U.S. stocks. Those catalysts are still in motion. The valuation gap is still wide. The currency question is real and needs to be managed, not wished away. The Iran shock remains a concern, but it’s not a thesis-breaker.

International equity is not a hedge for us. It is a source of return—and at these relative valuations, with these catalysts intact, it is still the right place to be.

Well, until the data says otherwise.