International Stocks: The Potential to Outperform U.S. Equities in 2026

For the better part of the past couple of decades, a diversified portfolio of American stocks provided U.S. investors with ample diversification. In fact, incorporating foreign stocks into this mix often led to underperformance compared to domestic holdings. However, current market conditions suggest that it might be time for investors to reconsider this strategy.

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As the old adage goes, though, nothing lasts forever. Despite the recent impressive recovery of most domestic growth stocks, investors should now consider adding some international exposure to their portfolios for several compelling reasons.

Understanding the Two Major Challenges Impacting Investments

The first challenge is the most apparent one: the potential consequences of the military conflict between the United States and Iran. This situation is not just a geopolitical issue; it significantly affects global markets and investor sentiment.

Regardless of your stance on the underlying issues, it is clear that this conflict is incurring substantial costs, both in funding military operations and in disrupting international trade networks. Several nations are forming strategic alliances to counter the new import tariffs imposed by the U.S., resulting in deeper trade agreements among themselves and leading to reduced reliance on U.S. companies. This shift indicates a possible decline in demand for American goods and services.

The full impact of these dynamics is still unfolding, but early indicators suggest a shift. For instance, the International Monetary Fund (IMF) recently revised its 2026 GDP growth forecast for the United States from a modest 2.4% down to 2.3%, predicting an even weaker 2.1% next year. In contrast, the IMF anticipates a global GDP growth rate of 3.1% this year, despite the ongoing ramifications of the conflict in the Middle East.

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Another significant reason why international stocks may outperform their U.S. counterparts this year relates to the rapid advancement of artificial intelligence (AI). The economy of the United States is predominantly service-oriented, with 73% of its output derived from services, while only 16% is from manufacturing, with the remainder contributed by government spending.

This distinction is pivotal. As highlighted by a team led by Bank of America‘s chief global strategist, Michael Hartnett, in February, artificial intelligence technology provides significantly greater value to manufacturing sectors through enhanced automation and productivity than it does to service sectors like restaurants or retail, which rely heavily on human interaction. As a result, economies focused on production, such as China, can leverage these advancements to surpass the growth of the U.S. economy. Furthermore, Hartnett and his team forecast that this trend could enable foreign stocks to outperform domestic stocks for an extended period, potentially up to a decade.

Implementing a Strategic Investment Approach

None of this suggests that a U.S.-centric investment vehicle like the SPDR S&P 500 ETF Trust (SPY +0.81%) is entirely without merit. In fact, maintaining a considerable exposure to domestic equities is advisable, as the uncertainty of the future makes it impossible to predict outcomes with complete confidence.

Schwab International Equity ETF

Today’s Change

(0.65%) $0.17

Current Price

$26.31

Key Data Points

Day’s Range

$26.14 – $26.36

52wk Range

$20.34 – $27.17

Volume

8.2M

If you seek to maximize your potential upside while also minimizing risk exposure, consider stepping into an investment in something straightforward, like the Schwab International Equity ETF (SCHF +0.65%) or the Vanguard Total International Stock ETF (VXUS +0.94%), both of which completely exclude U.S.-based companies from their portfolios.