Why bother investing beyond the US?

As we stepped into 2025, many investors anticipated another stellar year for US markets. Given that American stocks have consistently outperformed their global counterparts for nearly 15 years (Fig. 1), it's understandable why this consensus has taken hold.

However, history tells a different story. There have been numerous periods where markets outside the US have taken the lead. Market leadership often shifts when winning markets start pricing in overly optimistic scenarios that don't fully materialize.

While it's still early in 2025, we've already seen signs of new market leadership. Chinese stocks have surged by double digits in US dollar terms, driven by domestic advancements in artificial intelligence, President Xi's improved rapport with the private sector, and a swiftly changing global geopolitical landscape (see?What’s behind the resurgence of Chinese stocks?). European equities are also outperforming, buoyed by the increased likelihood of a Russia-Ukraine ceasefire and the results of the German elections, among other factors.

Could this be the year the US finally relinquishes its top spot to other major markets? While it's impossible to predict with certainty, we see at least three compelling reasons to invest internationally:

1. US stocks aren't cheap: Historically, valuations have been poor predictors of short-term returns but become more significant indicators over the medium to long term. In other words, you can buy into an expensive market and still see great performance in the short run. However, paying a premium can hinder performance over a few years. US equities are trading at a 12-month forward price-earnings ratio of nearly 22x, well above their 10-year average, and at a much larger premium compared to emerging market and European stocks. While US equity valuations don’t appear extreme and may be justified by fundamentals, few would call the US market inexpensive.
2. The US dollar isn't cheap: The greenback is at its highest inflation-adjusted levels in over 30 years. If the US dollar cycle were to reverse, as it has many times before, it could bolster US dollar returns in markets outside the US.
3. Our TRIOs are global: We believe there are transformational innovation opportunities (TRIOs)—such as Artificial Intelligence or Power and Resources—that will drive markets in the coming decade. While companies at the forefront of these trends will certainly be found in the US, the universe extends far beyond.

Moreover, the discussion about geographic diversification shouldn't be limited to stocks. Emerging market US dollar-denominated bonds, for instance, are a true?investment portfolio workhorse. Their performance over the last 20 years has been solid—not just in total return terms, but also when adjusted for volatility; they currently offer appealing yields in the 6.5% to 7.5% range.

In a time when politics, policy, and geopolitics are evolving at warp speed, the year-to-date market performance serves as a stark reminder that portfolios can benefit from a broad geographic footprint.

------------

Visit our website for more UBS CIO investment views.

Don’t miss our UBS LatAm Access podcast in Spanish and Portuguese where you can follow our views on the top macroeconomic, political, and social trends globally and in Latin America. Listen now and subscribe on Apple podcasts or Spotify.

Please visit ubs.com/cio-disclaimer