CONTRIBUTORS
Vivek Gandhi, CFA
Portfolio Manager
Putnam Investments
“The end of US exceptionalism” is a phrase increasingly echoed in financial circles, often cited to explain the recent outperformance of international stock markets. Indeed, most international markets have outperformed US indexes in US dollar terms in 2025.
As of April 30, 2025, the broader European benchmark STOXX Europe 600 Index outperformed the S&P 500 Index by over 20%, with the European benchmark up 20% and the S&P 500 about flat. Germany leads this rally, where the DAX Index is up over 33%.1
But does this signal the end of “US exceptionalism?” That depends on how we define it. If we define US exceptionalism as the dynamism, entrepreneurship, and risk-taking culture that drives innovation and commercialization, then little has changed. While the United States faces policy-induced uncertainty, the fundamental strengths of its economy remain intact. At worst, we believe they have suffered a minor flesh wound, not a fatal blow.
However, this does not mean international markets can’t continue to outperform. From 2009 to 2024, US markets outperformed international peers following the 2008-2009 global financial crisis. But before that, there were prolonged periods—notably 1971–1982, 1982–1989, and 2000–2007—when international markets led. For the 2000–2007 period, the MSCI EAFE Index returned over 90%, while the S&P 500 Index returned just 14%.2 Emerging markets fared even better. At the time, the key drivers were attractive starting valuations, dollar weakness, interest in global diversification, and a commodity super cycle. Today, similar conditions are reemerging.
International equity valuations are attractive both relative to history and to US peers. As of April 30, 2025, the S&P 500 trades at nearly 23x earnings. Even excluding big tech, it trades at 20x—well above its 20-year historical range of 14x–17x. In contrast, the STOXX Europe 600 trades at about 14x, in line with its long-term average. European markets typically trade at a discount to US markets due to slower economic growth and a higher regulatory burden. But the current discount is wider than historical norms.
Growth dynamics are also shifting. While US growth is historically stronger due to better demographics and productivity, recent performance has been fueled by persistent fiscal stimulus. Since 2022, the US has run annual fiscal deficits exceeding 5% of gross domestic product. Meanwhile, Germany has kept its deficit below 3% annually. Coupled with high energy costs following Russia’s invasion of Ukraine, Europe’s industrial sector, especially Germany’s, has stagnated. Fortunately, this is reversing. As the United States tightens fiscal spending, Germany is expanding it. With energy prices falling even without a formal peace settlement in Ukraine, European growth is set to improve, potentially narrowing the gap with the United States. Historically, markets have tended to reward marginal change—and here, the shift is clear: US growth is slowing while European prospects are strengthening. This should be reflected in relative earnings trends.
Currency dynamics also favor international markets. The US dollar appears both technically weak and fundamentally overvalued. From 2000 to 2007, dollar weakness helped drive international outperformance. A similar trend may now be underway. The dollar has weakened in 2025 even during risk-off periods—a sharp contrast to its traditional role as a safe haven. According to the Organisation for Economic Co-operation and Development (OECD), the dollar remains overvalued on a purchasing power parity (PPP) basis compared to the euro, pound, and yen. Persistent dollar weakness would enhance US dollar-denominated returns from international equities.
Finally, diversification may be making a comeback. The late Nobel laureate Harry Markowitz famously called diversification “the only free lunch in investing.” Yet after 15 years of US dominance, global portfolios are heavily overweight US stocks, which now make up roughly two-thirds of global market capitalization. A modest reallocation toward international equities could trigger significant capital flows, which in turn could fuel relative outperformance—and further inflows.
Endnotes
1The S&P 500 Index is a market capitalization-weighted index of 500 stocks designed to measure total US equity market performance. The STOXX Europe 600 is a broad measure of the European equity market. The DAX is a German stock market index that tracks the performance of the 40 largest companies trading on the Frankfurt Stock Exchange. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2The MSCI EAFE Index is an equity index which captures large- and mid-cap representation across 21 developed market countries, excluding the United States and Canada.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility.
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