The case for allocating to international equities

International equities currently trade at a discount compared to US equities, presenting a potential opportunity for diversification within investment portfolios. Despite recent market shifts, international equities are considered valuable for balancing portfolios due to their diverse opportunity set. The market conditions in 2025 suggest a favorable environment for international equities to outperform, driven by the persistent valuation gap and concentrated US market leadership.

The dominance of US equities post-2008 Global Financial Crisis (GFC) was fueled by stronger economic growth, higher fiscal spending, lighter regulation, and a culture of innovation, particularly in IT and healthcare sectors. The US Federal Reserve's monetary policies, including low-interest rates and liquidity injections, significantly benefited growth-oriented US businesses, especially in technology and consumer industries. This environment contributed to the US market's significant capitalization and growth.

The paper argues for the strategic allocation to international equities, highlighting theoretical and topical reasons for their inclusion in investment strategies. Despite US market dominance, international equities offer compelling diversification benefits. The current market setup in 2025 is particularly conducive to non-US equities potentially outperforming, as they are positioned to capitalize on the valuation disparities and the concentrated nature of US market leadership. Financial advisors and portfolio managers should consider these dynamics when making investment decisions.