You Gotta Look Outside!

By Chris Brown, CIMA®, CRPC™
Vice President — Investments
Synovus Securities, Inc.

Spring is in the air and pollen is in the process of blanketing our cars. The U.S. equity markets have just completed the first quarter, and we are basically flat for the year when reviewing the performance of the S&P 500, the leading health barometer for the U.S. stock market. Though Q4 2024 earnings were extremely healthy, the policy fog is starting to become more evident with U.S. President Donald Trump’s administration to reign in U.S. government jobs, spending and the country’s debt expense. The Department of Government Efficiency (DOGE) slash-and-burn method has ushered in a “short-term pain for long-term gain” outlook for Q1 2025 and has recently spooked the markets, creating a swift selloff in late February, while at the same time, other areas in the global markets have seen a lift in their stock market performance. Many U.S. investors have been severely invested in developed international markets as well as emerging market countries, and for good reasons.  The long-term chart below shows the S&P 500 compared to the eurozone, emerging market countries and Asia.

S&P 500 Versus Europe, Emerging Markets and Asia Over 20 Years

It’s evident that the U.S. investment landscape had pulled away from the pack in mid-2012 and has not looked back, post GFC (great financial crisis of 2008). Owning investments outside of the U.S. markets seemed to be a recipe for under-performance, but is this time different? Well, at least for the short term – yes.  The S&P 500 has recently locked in two back-to-back 20% upside performances, and as the U.S. started facing some uncertainty with Trump administration policies, international markets have started to rally. Below is the year-to-date (YTD) performance of international countries versus the S&P 500 and the numbers are hard to ignore.

International Countries Markets Outside Versus S&P 500 YTD

As you can see, the YTD numbers for 2025 provide a different narrative for the global markets. Poland leads the international markets with a whopping 39% YTD return followed by Chile, Germany, China, Brazil and South Africa posting double digit returns for the first quarter of 2025.

What I have found throughout market history is that U.S. outperformance is not permanent, but cyclical. U.S. exceptionalism has reigned supreme for more than 12 years, but over time the attractiveness of markets that have underperformed and who may be undervalued become an attractive area for capital investment given the right market conditions. There are three major market shifts from U.S. exceptionalism to international investments in 2025.

 

1. The expensive nature of the U.S. tech sector that comprises 38% of S&P 500, causing investors looking for less expensive investment opportunities.
2. Geopolitical shifts and regional favoritism with tariffs imposed by the Trump administration. Countries that may have below 20% imposed tariff and other trade exceptions.
3. Potential extended ceasefire in Ukraine, which may boost European stock valuations especially in the Baltic and North Sea region (Poland, Germany and the Netherlands).

Whatever the conditions may be, just remember that over time market leadership occurs in cycles.

 

S&P Outperformance Versus the World Outperformance

Please understand that diversifying outside of the U.S. markets is not insinuating a large U.S. market slowdown or near-term recession. Long-term investors should use diversification as a risk-hedging tactic opposed to following the herd.  The U.S. markets are resilient and the most innovative when it comes creating something from nothing. Artificial Intelligence (AI) medical advancements and private capital markets fund the research and development for many of the first-to-market products and services are examples of what U.S. businesses do best. But it is also naïve to think the rest of the world cannot catch up. U.S. investors are paying an almost 50%-plus premium to be invested within the S&P 500 when compared to global equities. The international markets are currently trading at a larger discount to their current valuations. There is a saying that I have found to be true when watching investment shifts like this: “Capital goes to where it’s treated best.” 

Here are easy ways to gain international exposure to your investments. Most 401k and other private sector retirement plans have an international selection for a mutual fund. In self-directed IRA or brokerage accounts where your choices are broader, you don’t have to spend a lot of time researching which country has the biggest catalyst for growth. Reach out to a Synovus advisor to obtain information on international investments. There are a plethora of investment options and index funds.

The most important question to ask yourself is, ‘How does diversification in my investments reduce risk and get me closer to my financial targets?’  Understanding your investment objectives, risk tolerance and time horizon may help you create a fortified investment plan for you and your family.  Diversification in your investment plan can help when market uncertainties arise, and cycles shift into unforeseen opportunities.