An analysis of Canadian portfolios showed a median allocation of 47 per cent to U.S. stocks, versus just 13 per cent for Europe and six per cent for Asia. (Photo by DANIEL ROLAND/AFP via Getty Images) · DANIEL ROLAND via Getty Images
It may be time for investors to shift their focus abroad, with a combination of factors creating a compelling case for international equities over their U.S. counterparts, Purpose Investments’ chief market strategist argues.
The note from Craig Basinger says that a decade of U.S. market dominance has left many portfolios lopsided. It points to long-term cycles, a pricey dollar, and a wide valuation gap as key reasons to consider rebalancing. So far in 2025, international markets have outpaced the U.S. by a notable margin — a trend Basinger believes may be more than just a short-term anomaly.
“Is the relative outperformance of international equity markets compared to the U.S. a signal of a changing long-term trend or just noise?” Basinger wrote. “Nothing is ever certain, but the supporting evidence certainly has us believing the signal has a higher probability.”
That signal is emerging as U.S. markets flash signs of overheating. Purpose cites the relative strength index (RSI) — a widely used technical measure of how rapidly prices have risen — which shows the S&P 500 and Nasdaq in overbought territory, meaning they’ve climbed so fast that a pause or reversal becomes more likely.
In contrast, major international indices are still trading well below that threshold, which Purpose sees as a window of opportunity for investors looking to rebalance.
There’s also a “historically wide” gap in valuations, with the S&P 500 trading at 22.5x forward earnings, compared with Asia (16.5x) and Europe (14.5x). Purpose also argues that the U.S. dollar is “on the expensive side,” compared to other major economies’ currencies. And although the greenback remains the dominant reserve currency, Purpose says recent policy uncertainty has eroded some of its appeal.
“We’re not U.S. dollar bears, as potential slowing of global economic growth may bid up the dollar, but the longer-term trend in coming years is likely on the downside,” Basinger wrote. “And that means other currencies likely will appreciate, again favouring international (unhedged obviously).”
Purpose argues that policy shifts abroad could help international markets catch up. Markets responded positively to Germany’s shift to spend more on defence and infrastructure. Japan has been gradually improving corporate governance and retail equity ownership is beginning to rise. Overall, U.S. trade uncertainty may be catalyzing pro-growth policies elsewhere, the note argues.
“This has become a bit of a kick in the butt of other nations to start pulling levers to increase their own growth prospects or attract capital.”
Story Continues
Over the years, investors have increasingly ended up overweight on U.S. equities, the report says, with an analysis of Canadian portfolios showing a median allocation of 47 per cent to U.S. stocks, versus just 13 per cent for Europe and six per cent for Asia.
“When most investors are on one side of the boat, it is usually best to move to the other side, or at least back to a more neutral position,” Basinger wrote.
Although Purpose sees good arguments to tilt international, the note stops short of calling for a wholesale retreat from U.S. equities, emphasizing that rebalancing is about disciplined risk management.
“Rebalancing doesn’t require a bearish outlook; it simply reflects the discipline of managing risk and recognizing that no rally lasts forever,” Basinger wrote.
“Not only does this shift diversify away from U.S.-centric risks, it also offers a broader range of potential winners in evolving global themes.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
Download the Yahoo Finance app, available for Apple and Android.