Will International Equities Recent Outperformance to U.S. Equities Continue?

Insights | Will International Equities Recent Outperformance to U.S. Equities Continue?

Author: David I. Templeton, CFA, Principal and Portfolio Manager

Over the past 15 years international developed market equities as measured by the MSCI EAFE Index have outperformed the S&P 500 Index in only four years and one of those years was 2022. Since 2010 the rolling 3-year return has favored the S&P 500 Index as seen in the below chart. Historically the length of the outperformance of either index has not lasted this long.

S&P 500 Index less MSCI EAFE Index 3-year rolling return

Since the beginning of 2022 though, international developed equities have outperformed the S&P 500 Index and over the last 12-months the MSCI EAFE Index return of 4.2% exceeds the S&P 500 Index return that is down -4.3%.

MSCI EAFE Index and S&P 500 Index 1 year return

Although U.S stocks have had an extended run outperforming the MSCI EAFE Index, equity fund flows into mutual funds and ETF's have favored international equities. The top two panels in the below chart show the flows into domestic (U.S.) equities and international equities. Fund flows into fixed income investments have had a fairly steady positive bias. Fixed income or bonds tend to serve as a shock absorber when equities decline. This was not the case last year with the Bloomberg U.S. Aggregate Bond Index down -13.01%.

Mutual fund and ETF flows as of April 19, 2023

With the recent 18-month period of developed international equities outperforming U.S. large company equities, possibly a longer trend is developing. The magnitude of the U.S. large cap outperformance can be seen in the below chart. Granted, U.S. large cap companies are doing business internationally, but maintaining some direct international exposure seems appropriate at this point in time.

MSCI EAFE and S&P 500 Index cumulative return last 15 years. April 21, 2023

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