Change is the one constant in life, and investors who embrace it can seize emerging opportunities. For decades, U.S. stocks have dominated portfolios, with other developed nations lagging behind. Global investors often added international holdings primarily for diversification, but foreign markets have historically moved in lockstep with the U.S., offering limited risk reduction benefits.
However, winds of change are blowing. Foreign markets, especially in developed European nations, may finally have their moment. International economies and markets are diverging from the U.S., creating potential for outperformance and genuine diversification as correlations decline.
Why Markets Are Diverging
The U.S. economy shows signs of a stagflationary environment, with inflation stubbornly above target and trending slightly upward. In contrast, the European Union has inflation at or near target and on a downward path. According to Eurostat, euro area annual inflation rose to 2.2% in September 2025, up from 2.0% in August but remaining close to the European Central Bank’s 2% target.
Meanwhile, U.S. consumer prices rose 3.0% for the 12 months ending September 2025, up from 2.9% in August, exceeding the Federal Reserve’s target amid persistent pressures in housing and services. This divergence could allow European markets to pull ahead as the ECB potentially eases policy more aggressively.
Europe is also accelerating efforts to decouple from U.S. defense technologies and supply chains, with massive public spending planned for reindustrialization. This stimulus comes as U.S. GDP growth trends downward. According to a May 2025 Goldman Sachs analysis, euro area defense spending could reach 2.8% of GDP by 2027, with broader reindustrialization efforts—like grid upgrades—adding 0.5-0.7% to annual GDP growth through 2028.
Labor markets further highlight the contrast. U.S. labor conditions are weakening, with decelerating job growth and softening real incomes. In Europe, however, labor markets demonstrate resilience, supported by strong real wage growth. August 2025 remarks from ECB President Christine Lagarde from Jackson Hole note that euro area employment grew 4.1% cumulatively from end-2021 to mid-2025, adding 6.3 million jobs—nearly double historical expectations—with unemployment at 6.4% and projected to fall to 5.7% by 2026.
Real wages, after a delayed 2% drop from 2021-2023, are recovering and acting as a shock absorber, bolstered by labor hoarding and foreign worker inflows. An ECB report from May 2025 confirms real wages have largely recovered from high-inflation declines, enhancing consumer spending power.
Tailwinds For International Markets
International developed markets thus face tailwinds where the U.S. encounters headwinds. Emerging markets also look appealing amid a weakening U.S. dollar. According to an August 2025 Morgan Stanley Research report, the dollar depreciated about 11% in the first half of 2025—the largest drop in over 50 years—and could lose another 10% by the end of 2026 due to slowing U.S. growth to 1.5% in 2025, Federal Reserve rate cuts, and policy uncertainties. This depreciation reduces debt burdens for emerging economies, boosts their competitiveness, and attracts capital inflows, enhancing asset returns.
Historically, EU economies faced structural disadvantages compared to the U.S., leading investors to overweight American stocks. But the global geopolitical landscape is shifting from a unipolar U.S.-dominated order to a multipolar world, with American political and economic influence waning rapidly. Europe’s push for strategic autonomy in defense and industry exemplifies this change.
Opportunities For Investors
These shifts open new investment avenues abroad with significant potential runway. Investors can enhance returns and bolster risk management through improved global diversification—if they keep an open mind and exercise patience.
Consider reallocating to European equities, which may benefit from fiscal stimulus and resilient labor markets. Emerging market assets could thrive on dollar weakness, offering higher yields and growth prospects. While correlations between U.S. and foreign markets have declined amid these divergences, maintaining a balanced portfolio remains key.
Embracing these winds of change requires looking beyond traditional U.S. dominance. As markets evolve, so too should investment strategies. The opportunity is here for those ready to sail with the breeze.