For the better part of two decades, US equities have dominated global returns. But a shift could be underway.
In 2025, the MSCI EAFE Index (which tracks developed market equities outside the US) generated 31.2% returns.[1] In comparison, the S&P 500 returned 17.9%.[2] Year-to-date, the two indexes have tracked each other closely, each returning about 7.9% as of June 5th. These figures indicate that international markets may be narrowing a long-standing performance gap. And that shift doesn’t appear to be a one-off; instead, it’s supported by structural trends in global capital allocation.
With America becoming more domestically focused, other countries are filling the gap with historic levels of investing in themselves. For the first time in a generation, that means some of the world’s strongest economic tailwinds could be outside the US. Given these shifts, investors may want to consider whether their portfolios are positioned to benefit.
America’s Changing Role
The argument for increasing international equity exposure starts close to home. Today, political shifts in the United States have made national interest-focused policies more prominent than at any point since before World War II. The effect has been an increasing retreat from the rest of the world.
The US once acted as the de jure head of NATO. Now, US officials cast doubt on whether the alliance should exist at all.[3] Similarly, the US has historically championed free trade. But America’s use of tariffs indicates that frictionless global trade can no longer be taken for granted.[4]
Across both security and economic domains, the end result is the same. The world once organized itself around America’s architecture of collective defense and open commerce. To international partners, that architecture now appears increasingly unreliable, prompting a greater focus on self-reliance.
The International Investment Wave
In response to America’s changing focus, the world is taking action. The gap left is being filled by international markets investing domestically.
This action is particularly evident in Europe. Across the continent, defense commitments are on track to reach 2.9% of GDP by 2030, amounting to roughly €800 billion in anticipated annual spending – double where they were in 2019.[5] Jointly backed EU debt (long a sticking point for countries like Germany) now seems like a realistic possibility to fund growing defense commitments.[6]
And this action isn’t limited to defense. The EU’s Clean Industrial Deal is targeting over €100 billion in funding for domestic manufacturing, alongside dedicated critical minerals programs. Meanwhile, the bloc’s 2023 Chips Act has already mobilized €52 billion in semiconductor supply chain investments, with follow-on legislation targeting €120 billion.[7]
Outside of Europe, Japan is investing $275 billion over five years to modernize its military.[8] South Korea, Australia, and Canada have all substantially increased commitments as well.[9] Taken together, these actions mark a domestic spending wave that has few precedents outside of wartime.
In the long term, these investments will help the world adapt to a more reserved America. In the near term, they’re also likely to be a significant tailwind for each country’s domestic economy.
From Budgets to Balance Sheets
For investors, the question is where this public spending ends up. In many cases, the answer is corporate balance sheets.
Consider Rheinmetall, Germany’s largest defense company. In 2025, the German government’s defense spending grew by 24% from the year before.[10] On the back of that spending, Rheinmetall’s order backlog now stands at a record €73 billion.[11]
This type of spending also has second-order effects. Purchasing a fleet of military vehicles means investing in manufacturing, component suppliers, and skilled labor. This multiplier effect can ripple through the wider economy well beyond the headline figures.
For internationally focused investors, the result is a rising tide. Companies with public contracts benefit from the spending wave directly, while others benefit indirectly through broader growth. And there’s a final factor that could tilt the balance further still: the US dollar.
The dollar has historically served as the world’s reserve currency. But America’s current policies have encouraged other countries to seek alternatives. BRICS members have signed several local currency trade settlement deals, and global central banks continue to diversify their reserves away from the dollar.[12]
This “de-dollarization” could be a tailwind for US investors in international companies. Long term, reduced global demand for the dollar might mean a structurally weaker currency. And when the dollar is weak, returns earned in euros, yen, or won are worth more when converted back home.
The Case for International Exposure
Investors may already have more exposure to foreign earnings than they realize. S&P 500 companies derive about 28% of their revenue from foreign markets. [13]
But allocations to high-quality international companies can offer targeted exposure to this trend. We are focused on large-cap global leaders in developed countries, with a particular emphasis on Europe. Within that, we favor sectors positioned to benefit directly from rising government spending, including industrials, materials, and technology.
America’s continuous shifting political landscape isn’t guaranteed. But even if the US were to reverse course tomorrow, it’s unlikely that other countries would abandon the domestic capacity they’re building today. Once a country rebuilds its industrial base, it doesn’t dismantle it with the next US election.
The world is spending its way toward self-reliance. For US investors, that means some of the most compelling growth opportunities may be increasingly offshore.