The Case for Non-U.S. Growth Equities

U.S. stocks delivered strong results in 2024 as the nation’s economy outperformed most developed and emerging markets. The S&P 500^® Index left a trail of new highs on the way to delivering the second consecutive year of double-digit gains.

While recency bias may cause many to expect such dominant performance to continue, history has demonstrated that market leadership tends to shift over time. Given the significant uncertainties in geopolitics, policy and trade affecting global markets, we believe now is an opportune time to review portfolio allocations to ensure adequate non-U.S. exposure.

Cyclical Leadership in U.S. and Non-U.S. Equity Markets

Over the last 53 years, there’s been roughly an even split between periods of U.S. and non-U.S. market leadership. As Figure 1 illustrates, each has experienced extended periods of dominant performance.

Most recently, U.S. stocks, especially those of large-cap tech firms, have generated robust earnings growth and delivered attractive returns.

However, there’s no guarantee this handful of stocks can sustain their momentum, particularly given estimates that earnings growth will broaden in 2025.

After a period of underperformance, non-U.S. equity valuations also appear more attractive. There is a noticeable gap between the forward price-earnings (P/E) multiple for the MSCI EAFE and MSCI U.S. indices – more than two standard deviations from the 20-year average.¹

Five Trends Fueling Non-U.S. Earnings Growth

In addition to attractive valuations and a history of rotating market leadership, we believe there are solid fundamental reasons why investors can invest confidently outside the U.S. Even in cases of macro weakness, growth is still possible. The MSCI Germany Index rose by 11.03% in USD terms last year despite a depressed economy.²

We believe these five trends could fuel a positive inflection in earnings growth in non-U.S. companies.

Ongoing AI Infrastructure Boom

Artificial intelligence (AI) continues to be a durable theme, benefiting semiconductors, hyperscale data centers and related businesses.

Taiwan Semiconductor Manufacturing Company (TSMC), which produces advanced chips for AI, is one notable example. In 2023, the company held roughly 28% of the global market share for semiconductors, not counting memory.³

SAP, the Germany-based provider of enterprise software, has reported increasing demand for its cloud offerings and a growing backlog. Several of its recent deals involved use cases involving artificial intelligence.⁴

Rising Power Demand in Global Markets

AI’s vast need for electricity has also helped spark growing demand for power generation and distribution, though AI isn’t the only driver. The shift to sustainable energy, growth in electric vehicles and the need to upgrade aging infrastructure also contribute to demand. This supports energy, construction, materials, industrials and other businesses, such as Schneider Electric and Siemens Energy.

Government stimulus programs in several countries are reinforcing the AI and power trends. Policymakers have launched programs to aid the renewable energy, construction materials and semiconductor industries, as well as the utilities and industrials sectors.

Resilience of Non-U.S Consumer Spending

Real wage growth could improve in many nations as unemployment remains low and inflation continues to ease. This may help consumer spending, bolstering consumer staples and consumer discretionary. In particular, China has announced support for further stimulus to encourage demand in its market. The government is emphasizing consumption-driven spending, which could aid multiple industries.

We like On Holdings, a Swiss-based athletic shoe and apparel company that has beat earnings expectations. Online travel booking businesses such as MakeMyTrip of India and Trip.com of China also present opportunities, as does Italian automaker Ferrari.

Growth and Efficiency Through Non-U.S. M&A

Meanwhile, increased mergers and acquisitions (M&A) activity could benefit investment banks in the financials industry, make these businesses more competitive and raise their profits. We expect increased activity in capital markets due to a more supportive regulatory environment in the U.S., corporate governance reforms in Japan and a lack of organic growth in Europe.

Digitization Is Transforming Japan’s Economy

Finally, we like Japan-based companies benefiting from improved corporate governance standards and the rising digitization of the Japanese economy. Compared to the U.S., IT spending has been anemic, but that is changing as Japan invests in technology to improve efficiency and address rising inflation. NTT Data, a Japan-based IT services and consulting company, could benefit from this.

Stimulus May Serve as a Catalyst

Sluggish growth has weighed on investor sentiment, particularly in Europe. Weak cyclical demand, especially related to Chinese consumption, has hurt large European industries such as German autos and French luxury goods. The conflict in Ukraine and President Donald Trump’s proposed tariffs have also exacerbated the bearish outlook.

However, new stimulus could improve this outlook. Many central banks continue to cut interest rates, and China has signaled that it will take more action to improve its economy.⁵ A resolution to the tariff risk and a ceasefire in Ukraine might lift some geopolitical concerns.

No one can predict what 2025 will bring, but we believe investors who diversify across markets will be better prepared for whatever occurs.