Understanding U.S. Equity’s Historical Outperformance: A Case for Balanced Global Exposure

   By Joe Halwax
   Senior Managing Director, Institutional Investment Services

   

 

   Jon Morris
   Senior Analyst, Investment Research
 

 

September 2, 2025

Investors watching market headlines last week were met with a familiar occurrence: lots of attention being paid to one of the “Magnificent 7” mega-cap technology stocks. In this case, all eyes were on Nvidia, which reported its latest quarterly earnings after the closing bell Wednesday.

Nvidia continues its role as the bellwether for AI chip development. After nearly tripling in 2024, the stock is up another 35% in 2025, though it dipped in post earnings trading following a second consecutive quarter of data center revenue missing estimates. Still, the company beat earnings and revenue expectations, with guidance for Q3 revenue of $54 billion exceeding consensus estimates. Nvidia’s data center business remains central to the global AI buildout, with CFO Colette Kress projecting $3–$4 trillion in AI infrastructure spending by decade’s end.

With the reaction to Nvidia’s earnings in the news, we wanted to take a closer look at a trend the company has contributed to: the decade-plus-long outperformance of U.S. equities over their international counterparts.

While this trend has reversed some in 2025, the S&P 500 has outpaced developed international markets by a cumulative 150% over the past fifteen years. The success has been so pronounced that U.S. large-cap stocks are now considered by many to be the default choice for long-term investors, with international exposure at times viewed as an unnecessary risk.

However, a deeper analysis reveals that this outperformance story is more complex than it appears on the surface. Understanding the sources of U.S. equity’s past dominance provides important insights for portfolio construction and the role of international diversification going forward.

The Three Drivers of U.S. Outperformance

According to research from asset management firm GMO, just three drivers explain the entirety of U.S. equity market outperformance over the past fifteen years:

1. Dollar Strength

A significant portion of U.S. equity outperformance can be attributed to the dollar’s rally against virtually every major currency over the past fifteen years. When international returns are measured in U.S. dollars, currency movements become a critical factor. The dollar’s strength has been a powerful tailwind for U.S.-based investors, making domestic investments appear more attractive on a relative basis. However, currency movements are cyclical by nature. This year, the dollar has dropped from its historical highs, contributing to international stocks’ outperformance of U.S. equities so far in 2025 (also read: Understanding the U.S. Dollar’s Recent Declines and What It Means for International Equity Performance).

2. Valuation Expansion

U.S. stocks have also benefited from expanding valuation multiples relative to their international peers, meaning traditional valuation metrics like price-to-earnings ratios have swelled for many U.S. companies. This valuation expansion reflects growing investor confidence in U.S. stocks; it implies investors are willing to spend more right now for a share of these companies’ future profits than they have historically. But it also represents a temporary boost to returns that cannot be repeated indefinitely. Higher valuations today necessarily imply lower expected future returns, all else being equal.

3. Fundamental Outperformance

The third component of GMO’s analysis is arguably the most important for long-term investors. Fundamental performance includes dividends, share repurchases and organic business growth. According to GMO, U.S. companies have indeed delivered superior fundamental returns, justifying at least part of their premium valuations through actual business performance.

Let’s go back to Nvidia for a moment. The company just reported revenue growth of 56% in its recent earnings announcement. That’s staggering growth for a company of its size that has already been dominating its industry for years, and this was actually the company’s slowest quarter for growth since mid-2023, when the generative AI boom began driving results. But these astronomical growth rates are another thing that investors may rightfully question just how long it can be sustained.

The Magnificent Few vs. The Many

The story becomes more nuanced as we consider how outsized of an impact the Magnificent 7 have had on the U.S. outperformance trend. In fact, when the Magnificent 7 are excluded, the performance of the broader S&P 500 begins to look much different. Let’s start with a look at fundamental company results:

	S&P 500 Excluding Mag 7	MSCI ACWI ex-U.S. Index
Estimated 3-5 Year Earnings Per Share (EPS) Growth	11.7%	9.0%
Historical 3-Year Revenue Growth	10.4%	13.1%
Historical 3-Year EPS Growth	0.6%	9.3%

^{(Source: Wespath, FactSet. As of August 27, 2025.)}

As the table shows, the 493 companies outside the Magnificent 7 have seen their earnings stagnate over the past three years, compared to the 9% earnings witnessed by international companies in that time, as measured by the MSCI ACWI ex-U.S.

This concentration of success creates an important consideration for investors. This is further punctuated when considering valuation metrics. Comparing again the S&P 500 ex-Mag 7 and the MSCI ACWI ex-U.S., we see that these U.S. stocks are trading at a 25.2 weighted average price/earnings ratio vs. the 16.6 weighted average price/earnings ratio of their international peers.

In other words, while the Magnificent 7 companies comprise about 32% of every dollar invested in the S&P 500, the remaining 68% represents a group of companies with softer recent results that nonetheless trade at significant valuation premiums to international peers.

The Case for Global Diversification

It is true that international markets have faced prolonged challenges since the 2008 financial crisis, including debt overhangs, policy uncertainty and sluggish global growth. And regional diversification has lagged for years, even if the underlying fundamental data mentioned above is compelling.

But such periods often precede opportunity. Japan's equity markets, for example, struggled for two decades after their 1980s bubble before beginning to deliver strong returns in recent years. Today, international diversification offers exposure to different economic structures, attractive valuations and currency diversification (especially important if the dollar continues to weaken). And most importantly, balanced global exposure reduces portfolio risk from overconcentration.

None of this analysis is a knock on U.S. equities. The Magnificent 7 companies have built exceptional businesses with durable competitive advantages, and U.S. markets continue to offer depth, liquidity and innovation that remain attractive to global investors. We can also see in the charts above that the non-Magnificent 7 companies are expected to see strong earnings growth over the next several years. Still, history shows market leadership rotates. Maintaining global allocations positions investors to benefit from shifting dynamics while managing geographic risk.