The question of whether international stocks will keep climbing isn't just academic. For anyone with a 401(k), an IRA, or a brokerage account, the answer shapes portfolio returns and retirement timelines. After a period of notable performance divergence where U.S. markets, led by tech giants, often overshadowed the rest of the world, the tide has shown signs of shifting. The short, balanced answer is: international equities have a credible path to further gains, but it's a path riddled with more "ifs" and "buts" than the relatively straightforward U.S. narrative. Their continued rise hinges on a fragile alignment of monetary policy easing, economic resilience outside the U.S., and a long-awaited closing of the valuation gap. Let's unpack that.

What's Inside This Analysis

The Recent Context: A Turn in the Tide?

For years, the story was "U.S. outperforms." The MSCI USA Index crushed the MSCI All Country World ex USA Index. Investors got used to it. But markets have a habit of humbling consensus. In 2024 and into 2025, we've seen periods where European and Japanese indices have not just kept pace, but led. The FTSE 100, Euro Stoxx 50, and Japan's Nikkei 225 have all had their moments in the sun.

Why the change? It started with valuation. International stocks have been cheaper for a decade. At some point, value acts as a gravitational pull, especially when other factors align. The primary catalyst has been shifting central bank policy. While the U.S. Federal Reserve has been cautious, the European Central Bank (ECB) and the Bank of England (BoE) initiated rate-cutting cycles earlier. The Bank of Japan, after decades of ultra-loose policy, finally moved away from negative rates but maintained an accommodative stance relative to the West. This earlier monetary easing provided a tailwind for non-U.S. economies and their stock markets.

Key Drivers That Could Propel International Stocks Higher

For the uptrend to sustain, several engines need to keep running.

1. The Monetary Policy Divergence Play

This is the big one. If major international central banks (ECB, BoE, Swiss National Bank) continue to cut rates while the Fed stays on hold or cuts more slowly, it weakens currencies like the Euro and Pound against the U.S. Dollar. That's a double-edged sword, but for large multinational companies that comprise these indices, a weaker home currency makes their exports more competitive and boosts the value of their overseas earnings when converted back. This can significantly lift corporate profits. Watch the policy statements from Frankfurt and London like a hawk.

2. Economic Resilience and Earnings Growth

U.S. growth has been stellar, but Europe avoided the deep recession many feared. China's stimulus efforts, though fragmented, are providing some floor under growth. The narrative of "U.S. exceptionalism" is being tested. If economic data from the Eurozone, the UK, and Japan continues to show modest but steady improvement, it will support corporate earnings. The latest earnings season for European blue-chips showed resilience in sectors like industrials, luxury goods, and healthcare. Earnings revisions—analysts raising their profit forecasts—are a key metric to track, and we've seen positive momentum in several international markets.

3. The Valuation Gap Remains a Compelling Cushion

Even after recent outperformance, the valuation disparity is stark. Look at the Cyclically Adjusted Price-to-Earnings (CAPE) ratio, a measure of valuation over a 10-year period. As of recent data, the U.S. market trades at a CAPE near 34. Major European markets are in the low-to-mid 20s. Japan, despite its rally, is around 25. This doesn't mean international stocks are guaranteed to rise, but it does mean they have a larger margin of safety and more room for multiple expansion (investors willing to pay more for each dollar of earnings) than their U.S. counterparts. You're simply paying less for future growth.

Here's the subtle mistake many make: they compare the P/E of the S&P 500 to the P/E of a broad international index and call it a day. That's surface-level. You must drill deeper. A huge chunk of the U.S. market's high P/E is driven by 7-10 mega-cap tech stocks. The median P/E of the S&P 500 is much lower. Similarly, international indices are heavy in financials, industrials, and materials—sectors that traditionally trade at lower multiples. The real question is: are you paying an appropriate discount for those sectors? Often, the discount is excessive.

The Major Risks and Headwinds

No analysis is complete without the downside. The road higher is not smooth.

  • Geopolitical Instability: This is the omnipresent cloud. The war in Ukraine directly impacts European energy security and costs. Tensions in the Middle East affect global trade routes. Taiwan Strait anxieties weigh on Asian markets. International portfolios are inherently more exposed to these shocks than a domestically-focused one.
  • A Stronger U.S. Dollar: If U.S. economic strength persists and the Fed keeps rates higher for longer, the dollar could rally. A strong dollar hurts returns for U.S.-based investors in foreign stocks, as it reduces the value of overseas profits when converted back to dollars. It can also create emerging market debt crises.
  • China's Spillover: A prolonged property slump or deeper deflation in China doesn't just hurt Chinese stocks. It drags down commodity-exporting nations (Australia, Brazil), European luxury brands, and German industrial exporters. China's health is a critical variable for global ex-U.S. growth.
  • Political Shifts in Europe: The rise of populist, fiscally expansive parties in major EU countries threatens the bloc's stability and fiscal discipline, potentially spooking investors.

How to Evaluate International Stocks for Yourself

Don't just take a headline's word for it. Build your own dashboard. Here are the specific data points I check monthly:

Metric What to Look For Where to Find It
Purchasing Managers' Index (PMI) Figures above 50 for the Eurozone, UK, Japan. Indicates economic expansion. TradingEconomics, IHS Markit releases.
Central Bank Policy Statements Dovish tone from ECB/BoE vs. Hawkish tone from Fed. Official ECB, BoE, and Fed websites.
Earnings Revision Ratio The ratio of earnings estimate upgrades to downgrades. Rising ratio is bullish. Refinitiv, Bloomberg (for professionals), or summarized in market reports from major banks.
Relative Strength (RS) Is the chart of an ETF like VXUS or EFA outperforming the S&P 500 (SPY) on a relative basis? Your brokerage charting tools. Plot VXUS/SPY.
Currency Trends (USD Index) A falling DXY (U.S. Dollar Index) is generally a tailwind for international returns. Any financial market data site.

A Regional Breakdown: Where the Opportunities Might Lie

"International" isn't a monolith. Performance will be uneven.

Developed Europe: A Value Play with Cyclical Leverage

Markets like Germany (DAX), France (CAC 40), and the UK (FTSE 100) are packed with global industrial, consumer staple, and financial companies. They are cheap. Their fate is tied to a Chinese recovery (for industrials) and global economic health. If the world avoids a recession, these markets could see strong earnings rebounds. The UK market, in particular, is trading at a deep historical discount due to Brexit-related pessimism, which may have overstayed its welcome.

Japan: Finally, a Different Story

This isn't the zombie Japan of the 2000s. Corporate governance reforms are real, pushing companies to focus on profitability and shareholder returns (via buybacks and dividends). The Nikkei breaking its 1989 high was a psychological earthquake. A weak Yen, while a problem for consumers, turbocharges the profits of exporters like Toyota and Sony. Continued inflation (after decades of deflation) is a positive sign for the economy. Japan is a unique mix of reform narrative and cyclical recovery.

Emerging Markets (Ex-China): The High-Growth, High-Risk Bet

This is where you look for pure growth. India, with its stable demographics and digital infrastructure push, is a consensus favorite, though valuations are rich. Mexico and parts of Southeast Asia (Vietnam, Indonesia) are beneficiaries of supply chain diversification away from China. These markets are volatile and sensitive to U.S. dollar strength, but they offer exposure to the fastest-growing middle-class consumer bases in the world. You invest here for growth potential, not stability.

Practical Steps for Investing in International Equities

You're convinced there's a case. How do you act?

For most investors, broad low-cost ETFs are the best tool. They solve the problem of single-country risk and complexity.

  • Core Holding: An ETF like VXUS (Vanguard Total International Stock ETF) or IXUS (iShares Core MSCI Total International Stock ETF) gives you everything in one shot—developed and emerging.
  • Targeted Exposure: If you have a regional view, consider ETFs like VGK (Europe), EWJ (Japan), or INDA (India).
  • The Currency Question: Some ETFs, like HEDJ, hedge currency exposure back to the U.S. dollar. This removes the currency risk (and potential reward). In a period of expected dollar strength, hedged ETFs can make sense. In a period of expected dollar weakness, unhedged is better. This is an active decision many overlook.

A common personal rule of thumb I've used is to gradually increase international allocation when the relative strength line (VXUS/SPY) is making a clear, sustained higher low. It's about rhythm, not trying to pick the absolute bottom.

Your Questions Answered

As a U.S. investor, what's the biggest hidden cost of investing in international stocks?
The hidden cost isn't in the expense ratio of the ETF. It's in the tax treatment of dividends. Many foreign governments withhold taxes on dividends before they are paid to you. For example, France might withhold 30%. You can often reclaim a portion of this by filing a form with your U.S. taxes (the Foreign Tax Credit), but it's an administrative hassle and you might not get it all back. This drag on income is rarely discussed in promotional materials but can nibble away at returns over decades.
I'm worried about timing. Have I missed the rally in international stocks?
Looking at the long-term valuation charts, it's unlikely you've "missed" it in the way one might have missed the first decade of the U.S. tech bull market. The outperformance is recent and from a very low base. Trying to time the exact entry is a fool's errand. A more prudent approach is strategic asset allocation. If your target is 30% international and you're at 20%, use dollar-cost averaging over the next 6-12 months to build the position. This removes emotion and timing risk from the equation.
With all the risks, why not just stick with the proven winner—the U.S. market?
Because history shows that leadership rotates. The 2000s were famously a "lost decade" for the S&P 500, while many emerging markets soared. The late 1980s saw Japan dominate. Concentration in the recent winner is a classic behavioral finance mistake called "recency bias." Diversification is the only free lunch in finance. It's not about abandoning the U.S.; it's about not putting all your eggs in one geopolitical, regulatory, and valuation basket. Sticking solely with the U.S. is a bet that its exceptionalism will continue indefinitely—a bet that has burned investors at major turning points in the past.

So, will international stocks continue to rise? The framework for a sustained rise is in place: attractive valuations, a supportive shift in monetary policy, and modest economic improvements. But it's contingent on a world that avoids major geopolitical explosions and where the U.S. dollar doesn't go on a relentless tear. For long-term investors, maintaining a significant allocation to international equities isn't a speculative bet on next quarter's returns. It's a strategic position in a more diversified, cheaper, and potentially mean-reverting global market. The rise may not be a straight line, but the direction, for now, has a credible case to be upward.