International stocks delivered impressive gains in 2025, outpacing U.S. equities and raising questions about whether this momentum can continue into 2026. The MSCI World ex USA index, which tracks large- and mid-cap stocks from developed markets outside the United States, climbed 32.6% for the year, significantly surpassing the S&P 500’s 16.4% return. This shift was driven by a weakening dollar and investor rotation away from U.S. markets amid concerns over trade policies under President Donald Trump.
Nobel Prize-winning economist Robert Shiller has weighed in on the outlook for international stocks versus U.S. equities. According to Shiller’s recent forecast, international markets appear better positioned for the next decade based on current valuation metrics. Meanwhile, U.S. stocks face potential headwinds due to historically elevated price levels.
U.S. Stock Market Valuations Reach Historic Highs
The S&P 500 has experienced remarkable growth since 2009, producing average annual total returns of 14.8%, well above its historical average. However, this performance has pushed valuations to concerning levels. The index currently trades at nearly 22 times forward earnings expectations, a multiple rarely seen outside of the dot-com bubble era.
More significantly, Shiller’s cyclically adjusted price-earnings (CAPE) ratio for U.S. stocks has climbed above 40. This metric, which uses long-term inflation-adjusted earnings history to smooth out economic cycles, has reached this level only once before—at the peak of the dot-com bubble. Additionally, stock prices in the S&P 500 have increased more than twice as fast as cumulative earnings-per-share growth since 2009.
Shiller Forecasts Muted Returns for U.S. Equities
Based on these elevated valuations, Shiller projects that international stocks will outperform U.S. markets over the next decade. His most recent forecast calls for average annual nominal returns of just 1.5% for the S&P 500 over the next 10 years. At that rate, investors would struggle to keep pace with inflation.
However, Shiller’s 95% confidence interval suggests a wide range of potential outcomes. The upper end includes the possibility of average returns around 10.7% annually, close to the S&P’s historic average. Conversely, the bottom end of his forecast range sits at negative 7.7%, indicating potential losses for U.S. stock investors.
International Stocks Offer More Attractive Valuations
In contrast to U.S. markets, earnings multiples in Europe and Japan have remained relatively stable over the past decade and a half. Even after their strong performance in 2025, international stocks still appear relatively inexpensive compared to U.S. equities when measured by historical valuation metrics.
According to Shiller’s analysis, European stocks could produce average annual returns of 8.2% over the next decade. Japanese stocks might deliver 6.5% annual returns based on his forecast. These projections significantly exceed his outlook for U.S. equities, suggesting international stocks can continue outperforming in 2026 and beyond.
Understanding the Valuation Discount
Several factors explain why European and Japanese stocks trade at lower valuations than their U.S. counterparts. Neither region has comparable exposure to artificial intelligence, the biggest growth trend of the past decade. Only a handful of popular AI-related stocks are available in international markets.
Furthermore, the business environment differs significantly between regions. The United States offers abundant investment capital and extremely low corporate tax rates following recent reforms. In contrast, capital availability is more limited in Europe and Japan, while corporate tax rates in countries like Germany and Japan remain considerably higher than the global average.
Investment Options for International Exposure
Investors seeking to capitalize on the potential for international stocks to outperform can consider several exchange-traded fund options. The Vanguard Total International Stock ETF provides broad exposure to developed and emerging markets outside the United States. Meanwhile, the iShares Core MSCI Europe ETF focuses specifically on European equities.
For investors interested in Japanese markets, the Franklin FTSE Japan Hedged ETF offers currency-hedged exposure. All three funds feature low expense ratios and can provide diversification benefits to portfolios heavily weighted toward U.S. stocks. However, the report indicates that Japanese stock forecasts may be distorted by the extreme bubble that country experienced during the 1980s.
Whether international stocks can sustain their outperformance will depend on various factors, including currency movements, economic growth differentials, and corporate earnings trends in different regions. Investors will be monitoring these developments closely as 2026 progresses.
