Meet Our Team
It has been something of a rite of passage in recent years. As the year gets underway in January, the financial chattering class lands on the age-old question. Is this Europe’s year? Is it time for portfolio managers to shift weights out of the US and into assets on the other side of the Atlantic? Typically, this festival of talking heads will take place immediately after a day in which the MSCI Europe Index or a similar benchmark ends up ahead of the S&P 500. In recent years, though, it has always ended the same way. Whether the out-of-US rotation was for one day or one month, US stocks always found their way back. Over the past ten years, the performance gap between US and non-US stocks has been immense. During this time the S&P 500 delivered a cumulative total return of around 308 percent, while the MSCI EAFE Index (an index of developed economies in Europe, Australia and the Far East) returned a cumulative 131 percent over the same period.
This year has been different. European bourses started 2025 on a strong note, and they are finishing strong. The chart below shows the relative performance of a handful of national European indexes, as well as the more broad-based EAFE index, versus the S&P 500 for the past 12 months. The returns are shown in US dollar terms, the relevant number for a US-based investor.
The Midyear Correction That Wasn’t
The sustained outperformance of European equities caught a number of market observers by surprise, particularly after US markets settled down in the weeks following the ill-considered “Liberation Day” tariff plan unveiled in early April. Once investors figured out that the White House was going to back away from completely scuttling the global economy, US stocks rallied sharply. In particular, the AI-themed growth darlings of the past three years, which endured a rough patch in the first couple months of the year, bounced back with their customary brio. AI infrastructure dollars kept pouring into the economy, raising growth expectations and (for the time being, anyway) putting paid to the earlier fears of an economy brought low by rising tariffs and fading consumer spending. Surely, investors thought, the moribund economies of Western Europe would once again pale in the background while US tech dynamism surged back onto center stage. That brief moment in the sun for European equities would end the way it always ends, with second-half doldrums leading once again to a second-place finish. But no, not this time. Throughout the second half of the year the relative performance numbers waxed and waned, but Europe and non-US equities generally held their ground and then some. Barring some entirely unexpected development between now and December 31, European equities will see out the year with a healthy record of outperformance.
Currencies and Other Matters
Investing in foreign assets, of course, exposes an investor to more than the underlying cash flows of the assets; it also exposes her to the currencies in which the assets are domiciled. Currently, the euro is up around 13 percent versus the dollar for the year to date. Let’s think about that in terms of our US-based equity investor with a position in European equities. That 13 percent currency differential translates to an immediate gain: even if the European equity position ends the year completely flat in local currency terms, our investor’s year-end statement records a 13 percent positive return.
But there has been more to the story than just the fact that 2025 was a relatively bad year for the US dollar. Currently, the total return for the MSCI Eurozone Index, which tracks the performance of stocks in the single currency region, is up around 39 percent versus 19 percent for the S&P 500 – a differential of around 20 percent. We can attribute 13-ish percent of that to the currency factor, leaving around seven percent of pure equity vs. equity outperformance. The question a reasonable investor wants to know is – why? And is that differential sustainable?
If by “sustainable” you mean “likely to outperform again in 2026” – well, who knows? The short term is unknowable. But if “sustainable” means a structural, medium to long term case for more diversification out of US dollar-denominated assets, then we would say yes. The world is a very different place today from what it was just several years ago. What that means specifically for Europe – or for China, or Japan, or for frontier markets in Africa, for that matter – remains to be seen. But having more geographic dispersion in one’s portfolio than may have been necessary in the recent past is, we think, an appropriate goal when looking beyond whatever happens in the next twelve months.