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March 26, 2025

International Comeback? Takeaways from Mexico City

Being an international stock picker at this point is a lot like being a New York Giants fan. Ten to fifteen years ago, things weren’t bad at all. Now merely getting back to mediocrity feels like a dream too big.

I primarily focus on American companies now but have always been a global investor. So I definitely have empathy for fund managers who specialize in international (i.e., non-U.S.) stocks.

International stocks have finally been having a few days in the sun after many years of rather drastic underperformance.

As of the end of trading yesterday, non-U.S. developed market (EAFE) stocks are up about 11% year to date. Emerging market stocks are up about 6%.

This is notably better than U.S. stocks, with the S&P 500 down about 1.5% so far this year, although doing better in recent days. At its lowest point in mid-March, the S&P 500 was down about 6%.

A large reversal over the past four weeks in tech stocks, especially the Magnificent Seven that dominate the top of the holdings list, has been the main drag on U.S. performance.

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Financial theory suggests one geography should not totally outperform another over a long period of time. Stock markets, while perhaps not perfect, are supposed to be generally efficient.

Sure, stocks in one country or region can do better than those in another in any given year or for a few years. But over time, it’s supposed to even out.

After all, investors are more or less taking on the same degree of risk and therefore should be rewarded similarly. “Reversion to the mean” is the statistical way of saying this.

That’s all just theory, though.

While we have seen a nice little bump in international stocks so far this year, if we are truly going to revert to the mean, we have a very long way to go.

And as any Giants fan can attest, a few strong possessions do not mean you are going to win the game.

Over the past 10 years, U.S. stocks have compounded at annual rate of return of 12.6% versus 5.6% for non-U.S. developed market stocks and 3.5% for emerging market stocks.

Put differently, investors who put money in international stocks 10 years ago are looking at total gains of 40% to 70%. Investors who put money in the S&P 500 have more than tripled their investment.

If international stocks are going to catch up with the U.S., we basically need to see a total collapse in earnings and multiples in the U.S. and/or the exact opposite happen outside the U.S.

This is hard to imagine, especially given the negative impact that a collapse in corporate earnings in the U.S. would have on foreign countries and companies.

International stocks could possibly do better than U.S. stocks in the years ahead—but catching up is nearly impossible at this point.

Checking in on Mexico

For better or worse, I find it difficult it to go to another country (or frankly leave my house) without wearing my investor hat.

So when I accompanied my wife on a business trip to Mexico City last weekend, I as usual approached it, at least partly, as a fact-finding trip. To be clear, a long weekend away with your spouse is no substitute for investment research… but it can be eye-opening.

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