International equities have underperformed the S&P 500, driven by poor relative growth and a strengthening U.S. Dollar, for over a decade. However, for the first time in 15 years, international markets are currently experiencing three conditions that have historically led to strong outperformance: a weakening U.S. Dollar, low valuations, and strong forward growth estimates.
After peaking in September, the U.S. Dollar has weakened significantly. We anticipate that this weakness may continue as U.S. growth slows, foreign interest rates become more competitive, and the U.S. trade deficit continues to narrow.
Valuations also appear to be at a long-term low on an absolute basis as well as relative to the S&P 500. Additionally, the dividend yield is roughly 1.5% points greater than the S&P 500, meaning you may be essentially “paid to wait” for international equities to outperform.
Global growth estimates are strong relative to the US and are higher than the historical average premium to the S&P 500.
Here is a look at the prior periods of major international equity outperformance over the S&P 500 and the current outperformance so far since October 2022.
Both the 1984-1988 and 2002-2007 periods saw a peaking U.S. Dollar, low relative and absolute international valuations, and above-average forward earnings growth.
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