Will the Outperformance of Non-U.S. Equities Continue?

August 11, 2017 | David Hernandez, CFA, Director of Traditional Manager Search

After several years of trailing the S&P 500, international equities are off to a strong start, returning 17.1% year-to-date through July. Is this the start of a longer term trend? This week’s chart examines the historical performance of the S&P 500 and the MSCI EAFE over the last thirty five years.

Since October 1982 the S&P 500 and MSCI EAFE have taken turns as the leader, each embarking on significant bullish runs. Between 2000 and 2007, international equities (7.2%) outperformed domestic stocks (1.4%). Then between 2007 and 2016, the S&P 500 beat the MSCI EAFE by over 7% on an annualized basis. The data shows that long periods of outperformance have been a common occurrence for both indices.

This year international equities have outperformed. They have benefitted from strong economic and earnings momentum, a clearer political landscape, and positive currency returns. All equities are expensive, but non-U.S. equities appear less expensive than their U.S. counterparts. While we cannot predict the future, the improved backdrop and relatively attractive valuations bode well for international equities.

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