For much of the past decade, U.S. investors didn’t need much convincing to stay close to home. But according to experts at a recent AllianceBernstein (AB) Product Due Diligence Session, the tide shifted dramatically in 2025, signaling a “new dawn” for non-US stocks.
Moderated by VettaFi’s Roxanna Islam, the session featured Brian Holland, a portfolio manager and senior research analyst, and Casey Hatch, head of equity BD Americas. Examining the “shift” in more detail, they laid out a compelling case for why the next decade of equity returns may look very different from the last.
The 2025 Wake-Up Call
The turning point, they argued, is already underway. In 2025, the MSCI EAFE Index climbed 32% in dollar terms. This significantly outperformed the S&P 500’s 18% gain.
For Holland, the significance wasn’t just the outperformance, it was how it happened. Where U.S. returns have been heavily concentrated in a handful of technology names, gains overseas were more broadly distributed. Value sectors like financials led the way, suggesting a change in market leadership rather than a short-lived rebound.
Why the Discount is No Longer Warranted
Even after that run, international equities continue to trade at a steep discount to U.S. stocks. The gap is roughly 30% on a price-to-free-cash-flow basis. Historically, that has often been justified by stronger earnings growth in the U.S. However, Holland pointed to several longer-term forces that could likely begin to close it.
European defense and electrical infrastructure spending is one major factor reshaping the market. NATO members are now pressured to lift defense budgets toward 5% of GDP over the next decade. At the same time, corporate behavior is also evolving. Non-U.S. dividends have risen sharply in recent years while share buybacks have accelerated. This reflects a broader shift toward shareholder returns.
Japan, too, is undergoing a transformation. Ongoing reforms from the Tokyo Stock Exchange (TSE) are pushing companies to prioritize return on equity and capital efficiency — changes that are already influencing how firms allocate capital.
Taken together, these developments are challenging the idea that international markets deserve to trade at a persistent discount. As Holland put it during the session, the gap has widened even as earnings quality has improved “a disconnect” that active managers are increasingly looking to exploit.
A Lower-Volatility Approach
For advisors wary of the volatility often associated with international investing, AllianceBernstein pointed to options such as the AB International Low Volatility Equity ETF (ILOW ). The strategy is built around what the firm calls a “QSP” framework: quality, stability, and price. In practice, that means three things: focusing on companies with durable growth prospects, identifying businesses that the market may be misjudging as riskier than they are, and maintaining discipline on valuation.
Since its inception in 2024, the strategy has aimed for a 90/70 outcome: capturing 90% of upmarket gains while only participating in 70% of the downsides. Historically, during periods when the MSCI EAFE was down, ILO outperformed by an average of 430 basis points.
A Diversification Case Re-Emerges
The broader takeaway for advisors is hard to ignore. With the S&P 500 increasingly concentrated — its largest constituents now accounting for a significant share of the index — international equities are once again being viewed as a meaningful source of diversification.
Companies such as Tesco, SAP, and Shell highlight the depth and global reach of non-U.S. markets. More importantly, they underscore a shift in narrative: International equities are no longer simply a cheaper alternative to U.S. stocks, but an increasingly relevant component of a balanced portfolio.
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