US stocks have led global markets for over a decade, driven by tech giants and strong earnings, resulting in high valuations compared to other regions.
In 2025, US equities are underperforming due to tariffs, political uncertainty, and margin concerns, while European markets are seeing a resurgence.
Whilst many investors may focus on these market shifts, we believe analysing individual stocks from across the globe will ultimately be the determinant of our success.
For over a decade, US equities have outperformed global peers, driven by superior earnings growth. This earnings growth has in turn been driven by the dominance of the US large technology companies as they have come to dominate extremely profitable and growing global markets like social media, internet search, semiconductors and software. This exceptional growth led investors to bid US companies up to exceptional valuations: as of early 2025, US equities trade at a significant premium to international markets, with the S&P 500’s forward Price to Earnings (P/E) ratio, one of the most popular valuation metrics of stocks, hovering near 24x, compared to 16x for developed ex-U.S. markets.
2025 has thus far been a rude awakening for those without sufficient global diversification. The US has underperformed global markets, pressured by rising tariffs, policy uncertainty under the Trump administration, and concerns about corporate profit margins. Non-US equities—particularly in Europe—are outperforming for the first time in years. This shift is driven by a combination of what we believe are attractive valuations, improving corporate returns, and a rotation away from US-centric tech exposure.
Those who are bullish on Europe would point to Europe “getting its act together”. Dramatic policy changes, rising corporate profits and capital markets reforms are gaining traction. For the first time in over a decade, there is a credible case for a European catch-up trade.
Yet, even as Europe shows signs of life, structural disadvantages remain that may prevent it from fully closing the economic profit gap with the US. These include fragmented markets, complex legal systems, expensive energy, a lack of venture capital infrastructure, more stringent regulation, lower innovation intensity etc. These persistent headwinds suggest that while Europe may narrow the performance gap, it is perhaps unlikely to displace the US as the global equity market leader.
But does it matter?
For sophisticated investors, the more important question may not be whether US exceptionalism is ending, but whether this is a question worth answering.
The return of a portfolio and its constituent stocks (Internal Rate of Return- IRR) is, by definition, earnings growth, plus dividend yield, plus any change in valuation. If we can find companies in EMEA that have higher forecast returns than the US (including the ‘Magnificent 7’ high performing tech stocks) then those are the companies, we will own. The reverse is also true.
In the Invesco Global Equity Income Trust, we are meaningfully underweight the benchmark exposure to the US but still have more than 40% of the portfolio in US companies.
East West Bank would be a great example of this - a business that we bought earlier this year. This is a very well-run regional bank, with an experienced CEO, Dominic Ng, who has over 30 years of service that has delivered consistent 12-13% Earnings Per Share (EPS) growth per annum over the last decade. In our opinion, it trades on an attractive 11x earnings, with a diversified loan book, has c2.5% yield with excess capital which could also be returned to shareholders.
While we can ruminate on whether the US continues its dominance in stock market terms (or not) and can make the case either way, it is these types of bottom-up investment decisions – that focus on analysing individual stocks and de-emphasises the significance of macroeconomic and market cycles - that we will focus on and ultimately believe they will be the determinant of our success.
Stephen Anness and Joe Dowling are Co-Fund Managers of the Global Equity Income & Growth strategy. Discover more about our fund and investment trust solutions, all managed in line with this strategy, below.
Find out what objectives a systematic active approach might aim to achieve and how an equity ETF using this strategy fits in between pure passive and traditional active management.
In this video, fund manager Bethany Shard shares her thoughts on the challenges of the last quarter and her outlook for UK equities.
In Q1 2025, Joe Dowling, Fund Manager of Invesco Global Equity Income Fund, discusses key market questions and their implications for the rest of the year.
