3 Tailwinds That Could Make International Stocks Soar

International stocks have recently outperformed U.S. markets, with the iShares Core MSCI Total International Stock ETF (IXUS) gaining 29% over the past 12 months versus the S&P 500's 22% rise. This reversal of the long-standing trend raises the question: is this a blip or the start of a sustained shift?

Three key tailwinds suggest the latter. First, international stocks trade at a significant valuation discount. The MSCI Total International Stock ETF has a P/E of just under 18, compared to the S&P 500's 26.5. The top 10 holdings in the international index account for only 14% of its weight, reducing concentration risk.

Second, AI-related valuation changes favor cheaper markets. The S&P 500's earnings are heavily concentrated in seven mega-cap tech stocks, inflating its P/E. International markets lack this AI premium, meaning even modest P/E expansion could drive strong returns.

Third, China's regulatory environment is maturing. In October 2025, China's Securities Regulatory Commission unveiled a two-year plan to refine foreign investor rules, promising greater transparency and shareholder protections. This could attract capital back to Chinese stocks like Alibaba (BABA).

While cheap stocks can stay cheap, and political risks remain, the combination of these factors creates a compelling case for international exposure. The article argues that investors should consider allocating to international stocks as a long-term play.

For years, U.S. stocks, especially tech, dominated global markets. If international stocks sustain their outperformance, it could reshape portfolio strategies. The valuation gap suggests that capital may rotate from overvalued U.S. stocks to cheaper international ones, boosting IXUS and similar ETFs.

AI is a key driver. While U.S. tech giants already price in AI optimism, international companies could see significant rerating as they adopt AI and improve earnings. For example, a 2-point P/E expansion from current levels would yield a roughly 14% price gain for international stocks, assuming earnings hold steady.

China's regulatory reforms add a catalyst. Improved transparency and investor protections make BABA and other Chinese equities more attractive. If foreign capital flows back, it could lift the entire emerging market segment.

However, risks persist. Geopolitical tensions, currency fluctuations, and the possibility that international stocks remain cheap could derail the trend. Investors should weigh these factors and consider a balanced approach, perhaps starting with a small allocation to international funds like IXUS.