Global Stocks Outshine U.S. – Exceptionalism Fading?

International stocks posted their strongest first-quarter outperformance against U.S. stocks on record, according to Dow Jones data.

In late 2024, the “American exceptionalism” trade was thriving, with investors pouring money into U.S. stocks following Donald Trump’s election victory in November. However, the first quarter of 2025 has painted a different picture. U.S. stocks have struggled due to the unwinding of artificial intelligence-driven trades and uncertainty surrounding tariffs, while international markets have surged ahead.

As of Monday, the S&P 500 (SPX) was on track to trail global stocks—measured by the MSCI All Country World Index ex-U.S. ETF (ACWX)—by nearly 11 percentage points in the first quarter. This would mark the largest first-quarter outperformance by international stocks on record, based on Dow Jones Market Data dating back to 1987.

Despite this shift, U.S. stocks have significantly outperformed their international counterparts over the past two decades. Since March 2005, the S&P 500 has risen 370%, compared to less than 65% for the MSCI All Country World Index ex-U.S. ETF, excluding dividends. This suggests that a “catch-up” trade is now underway.

“We’re finally seeing some reversion to the mean,” said Ryan Dykmans, chief investment officer at Dunham & Assoc. Investment Counsel, in an interview with MarketWatch. Historical data indicates that when international stocks outperform U.S. equities significantly in the first quarter, they tend to maintain that lead for the rest of the year.

Global Market Performance

Stock performance has varied globally in the first quarter. The STOXX Europe 600 (SXXP), covering eurozone, U.K., and Swiss stocks, is on track for its best first-quarter outperformance against the U.S. since 2015, according to Dow Jones data. In contrast, Japan’s Nikkei 225 (NIK) has struggled, falling over 10% in local-currency terms, according to FactSet data.

Currency Weakness and Foreign Investment Risks

For foreign investors in U.S. stocks, 2025 has been particularly challenging. The U.S. dollar has declined alongside equities. As of midday Monday, the ICE U.S. Dollar Index (DXY) had dropped about 4% for the quarter, while the S&P 500 had fallen over 5.5%, per FactSet data. This marks the first time both have fallen simultaneously in a calendar quarter since early 2018.

A weaker dollar amplifies losses for foreign investors. Many had avoided hedging their currency exposure due to the dollar’s historical strength. If U.S. stocks continue to lag, international investors may shift funds to Europe or other markets, potentially exacerbating U.S. stock losses in a negative feedback loop.

“There was a time when U.S. stocks were primarily owned by domestic investors,” said Hardika Singh, an economic strategist at Fundstrat Global Advisors. However, since the early 2000s, foreign investment in U.S. stocks has grown significantly. According to Federal Reserve data cited by Goldman Sachs, foreign investors held 18% of U.S. equities in late 2024, up from 7% in 2000 and just 2% in 1960.

By late 2024, U.S. stocks accounted for 57% of global equity market value, surpassing the peak of the dot-com bubble in 2000. However, their share has since declined to 54%.

Singh attributes the recent outperformance of international stocks to a “catch-up” trade rather than a long-term shift. While Trump’s tariff policies introduce uncertainty, their economic impact is expected to be global as trading partners retaliate. Moreover, U.S. companies are still projected to experience stronger earnings growth than their global peers in 2025, reinforcing Fundstrat’s expectation that U.S. stocks will regain leadership before year-end.

“It really is to the rest of the world’s advantage that the U.S. continues to do well,” Singh added.

On Monday, the S&P 500 rose 0.6%, trimming earlier losses. The Dow Jones Industrial Average (DJIA) gained 417 points, or 1%, reaching 42,001, while the Nasdaq Composite (COMP) fell 0.1% as Big Tech stocks continued to struggle.