Overseas equities are beating their U.S. peers. What’s next after this outperformance, per the charts
After years of U.S. dominance, international and emerging markets equities are outperforming the domestic market despite the strong narrative of a U.S.-led artificial intelligence revolution. Are these early innings of a broader regime shift? Or is it just a trade as investors get cold feet with the massive AI capital expenditures and corresponding return on investment on that spend, before U.S. equities power ahead once again as AI becomes our reality? Investors cite the onshoring, reshoring, protectionist policies of the Trump administration combined with better valuations in overseas equity that are driving this rotation. At Inside Edge Capital we do like to know the data — earnings and economic — behind our investment decisions, but we also consider ourselves “visual investors.” Looking at the charts gives us insight into key macro rotations happening in real time as markets discount the unknown, unreported future data. That’s a key distinction that you must keep in mind: Price changes you see today are not in reaction to data that is printed today. Today’s price changes are the markets discounting expected data six, nine, 12 and even 18 months from now. Let’s get into the maps and try to answer the question of whether this is a regime shift or an overreaction to AI cold feet. This is the monthly closing chart of the iShares MSCI Emerging Markets ETF (EEM) . You’ll see EEM has rallied sharply since 2023 by about 78%, but there is precedent with a prior 83% and 85% rally is about as far as it’ll go, suggesting there is resistance at around $65 in the chart — last price of $60.66. For your reference I’ve included the sector and country weights in the graphic. Notice that Asia-Pacific is about 75% of the weighting. Now we’re going to look at “ratio charts.” Instead of looking at one security by itself, we’re going to divide one security into another one to see a ratio chart. It’s a quick way to see relative performance of one security versus another. If the chart of ABC/XYZ ratio is going up, ABC is relatively stronger than XYZ. They both can be rallying or declining on their individual charts, but the ratio measures relative performance of one versus another. Below is a ratio chart of the S & P 500 index (SPX) and EEM dating back to 2004. You’ll notice at the far left of the chart the SPX/EEM ratio is falling from 2004 to 2011, which is the last period when emerging markets outperformed U.S. markets. I often cringed when investors coming aboard at Inside Edge bring us prior managed portfolios with the “customary” 30% allocation to emerging markets to be “diversified.” That 30% diversification cost the investor a pretty penny in terms of opportunity cost from 2011 to 2025. The ratio of SPX/EEM rallied 360% from 2011 to today, so emerging markets have underperformed U.S. equities by that much in 14 years. We’ve counseled against international market exposure until just recently. There is evidence that a regime shift might just be occurring, and we’ve begun adding international exposure to portfolios for the first time since we launched. The SPX/EEM ratio is pulling back, but there is potential for price support to come in and arrest this fall around the 115/110 zone. Looking beyond just the emerging markets, let’s get a visual of the iShares MSCI ACWI ex U.S. ETF (ACWX) compared to the SPX. To be clear we’re looking at the SPX/ACWX chart, so if the chart is moving higher, SPX is outperforming the all-world, excluding the U.S., ETF. SPX/ACWX has been in a clear uptrend until just recently in 2025 and is pulling back sharply. Yes, there is support — a price floor — sourced from the parallel uptrend channel, as well as the 200-week (four-year) moving average, as well as a former resistance/pivot zone (blue box) from 2023 to 2024. The ratio could indeed hold support and snap back higher in favor of the U.S. Or, if it breaks lower the regime shift could be here to stay for the foreseeable future. In the following two charts, we’re looking at the one-year individual country stock market performance versus the SPX. Some of the outsized returns from countries like South Korea and Peru relative to the U.S. may seem jarring and overdone. However, looking at the above long-term charts of a decade or more of emerging and international market underperformance to the U.S., gives us a big picture perspective that it could be over, and we have a lot further to go to close the gap. I have my doubts and view it as a temporary overreaction to U.S. artificial intelligence overvaluation and adoption fears. Our mission is to not waste energy on the impossible task of predicting the future, but, instead, use that energy to fully assess today’s reality of what the markets are attempting to discount into the future. We’ll keep on rotating client portfolios into overseas markets in response to the markets continuing to discount a future that sees international economic growth outpacing the U.S. I have my doubts, but I am fully aware that we’re not smart enough to predict the future. Instead, I am listening to what the market is trying to tell us today. — Todd Gordon, Founder of Inside Edge Capital, LLC We offer active portfolio management and regular subscriber updates like the idea presented above here . DISCLOSURES: Gordon owns EEM and EWW personally and in his wealth management company, Inside Edge Capital. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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