International stocks saw surprisingly strong gains in 2025, with equity markets in export-driven countries such as Korea and China outpacing the S&P 500 even after the U.S. imposed the highest tariffs seen in decades. Non-U.S. markets could rally further in 2026, fueled by falling interest rates and rising corporate earnings.
The MSCI AC World ex-USA index returned more than 32% in 2025, nearly double the 18% total return of the S&P 500. Some foreign markets did far better, with the iShares MSCI South Korea exchange-traded fund up 95% and the iShares MSCI Brazil ETF ahead 49%. A weaker dollar helped returns but wasn't the only driver.
The past year marked the end of a 15-year stretch in which foreign markets lagged behind the U.S. -- a reversal that could nudge more U.S. investors to look overseas for growth. In many markets, they will find less richly valued plays on artificial intelligence and electrification and improving economic and financial conditions.
Strategists at J.P. Morgan expect double-digit gains in 2026 across developed and emerging markets, spurred by robust earnings growth, lower interest rates, and fewer policy risks such as tariffs. Bargain-oriented investors such as Warren Chiang, manager of the GMO International Value fund and similarly named ETF, also see plenty of opportunity internationally.
In part, that's because non-U.S. markets are still relatively cheap. The MSCI World ex-U.S. index is trading for 15.6 times next year's expected earnings, roughly the same valuation as before its 2025 run. That reflects improving earnings and expanding price/earnings multiples, Chiang says.
The MSCI U.S. index sports a price/earnings multiple of about 23.
Across international markets, there is evidence of an improving backdrop. President Donald Trump's foreign and trade policies sparked a reset in Europe, where policymakers have pledged significant fiscal stimulus, including an increase in defense spending.
J.P. Morgan's Mislav Matejka, head of global and European equity, expects 10% to 20% earnings growth for the euro zone in 2026, as earnings benefit from fiscal stimulus and improving financing conditions, tariff risks diminish, and China's economy shows signs of stabilizing. An end to the Russia-Ukraine conflict would be an added plus.
The iShares MSCI Japan ETF returned 26% in 2025, but investors see more room for Japanese stocks to rise. Japan's recently elected prime minister, Sanae Takaichi, has business-friendly plans to lower taxes and offer incentives to bolster investment.
China's economy is still struggling, as evidenced by November's weak economic data. While Beijing is unlikely to unleash stimulus, recent comments from officials suggest the government has grown more serious about prioritizing a revival in domestic demand alongside a continued push for technological self-reliance. China has invested heavily in artificial intelligence, biotechnology, and other technologies.
Chinese AI stocks outperformed U.S. AI stocks this past year, but investors aren't fretting about a possible AI bubble in China, says Jitania Kandhari, head of macro and thematic research for emerging markets equity at Morgan Stanley. In China, the stocks' gains owed largely to rising price/earnings multiples. Shares will look cheap if earnings growth accelerates, Kandhari says.
Chinese tech earnings have bottomed after several years of declines, and recent results from cloud companies suggest reasons for optimism, she says.
While growth stocks have propelled U.S. indexes this year, value stocks have led markets higher in Europe and Japan. GMO's Chiang says he is still finding cheap companies overseas with good businesses, hefty margins, and significant competitive advantages. His top holdings include Germany's Deutsche Bank and Spain's BBVA, and Japanese industrial firms that are benefiting from reordered supply chains and government reforms.
Luiz Sauerbronn, a manager of the $2 billion Brandes International Equity fund , favors luxury-goods companies such as Kering, whose flagship Gucci brand has been hurt by weakness in China and a poor reception to recent collections. That created an air pocket in the stock, which has fallen by nearly half in the past five years, but was up 26% in 2025. Gucci, he notes, has recovered from setbacks in the past. Plus, Kering has a new CEO, Luca de Meo, formerly of Renault, who is trying to repair the company's balance sheet.
Richard "Trip" Clattenburg, manager of the $13.6 billion T. Rowe Price International Stock fund, likes quality stocks, many of which were more expensive, and thus overlooked when the rally in foreign stocks started last year. "There aren't many times when you get shots at relatively lower-risk, high-quality assets," he says.
Among Clattenburg's holdings: Unilever, which has new management, a road map for volume growth, and a 3.6% dividend yield. Clattenburg also owns Japan's Nippon Sanso Holdings, which makes industrial gases and has a lower valuation than larger rivals such as Air Liquide. He expects the company to get a lift from Japan's more business-friendly moves, but says the valuation provides a cushion if the global economy starts to sour.
Emerging market stocks still trade at a steep discount to the S&P 500, despite a preponderance of technology stocks in these markets. Within China, investors see opportunity in early adopters of AI. "China is a super-app country; it is harnessing [AI] in media, e-commerce, gaming, and travel," says Kandhari, who says semiconductor and semi-equipment companies, robotics, biotech, healthcare, and consumer-oriented digital platforms are among the beneficiaries. Brandes' Sauberbronn likes the outlook for Alibaba Group Holding, even after the stock's 75% rally in 2025, noting that near-term earnings are depressed because of the company's use of large subsidies to spur growth in its core e-commerce business. But the initiative is showing early signs of success. Alibaba also benefits from its strong position in AI with a "full stack model" that provides compute power, a cloud platform, AI models, and applications, he says.
India and Brazil aren't AI-focused markets and could fare better if the AI trade loses steam. India's market lagged behind in 2025 due to the negative impact of U.S. tariffs, sluggish economic growth, and investors' reallocation of assets to China. But T. Rowe's Clattenburg notes that the government and Reserve Bank of India are both pro-growth. Axis Bank is a private-sector bank that has cleaned up its loan book and should be an early beneficiary of an economic pickup, he says.
Brazil's market is tilted toward commodities and should continue to benefit as the push for electrification gains momentum. Also, inflation is expected to ease, which means monetary policy could loosen, helping stocks, says J.P. Morgan. Another plus: The Trump administration's focus on increasing influence in South America could mean more foreign direct investment, and an easing of the 50% tariffs President Donald Trump imposed on Brazilian goods earlier this year.
The Vanguard Total International Stock ETF $(VXUS)$ offers an inexpensive way for U.S. investors to gain broad exposure to international markets, with about a quarter of its assets in emerging markets. Capital Group International Core Equity ETF (CGIC) provides a broad-based strategy, with about half its weighting in Europe and the U.K.
For investors who favor actively managed funds, three options include the $986 million GMO International Equity Fund IV (GMCFX), which has returned an average of almost 25% a year in the past three years, beating 99% of its peers; Brandes International Equity fund (BIEAX), which returned 24% a year in the same span and beat 98% of its peers; and the $16.7 billion T. Rowe Price International Value Equity fund (TRIGX), which averaged an annual return of almost 22% in the same three years, outperforming 86% of its peers, according to Morningstar.
