Why International Stocks Are Having a Strong Year

Though they’ve wobbled recently, artificial intelligence stocks have led global markets so far in 2026. The US dollar is up, and higher energy prices have hit Europe and Asia hard.

Given these conditions, you’d think US equities would be outperforming their international counterparts. Not so. Morningstar’s broad benchmark for stocks outside the US has a slight advantage so far in 2026, even in USD terms.

Of course, in the third quarter of 2025 we talked about a larger margin of outperformance for international stocks. Last year marked an inflection point. After lagging for years, equities outside the US experienced a resurgence that has extended into 2026, through war and the AI infrastructure buildout boom.

This year has seen a real divergence between emerging and developed markets. The nuance is important to understand for investors allocating globally. The good news is that both asset classes hold investment opportunity, if you know where to look.

AI Infrastructure Spending Has Lifted Emerging Markets in 2026

Be honest, investors: Had you heard of SK Hynix 00660 before this year? According to my internet research, the South Korean manufacturer of dynamic random-access memory was known as Hyundai Electronics before going through some mergers following the 1997 Asian financial crisis. Back then, there was a global semiconductor supply glut.

How times have changed. “The current memory upcycle is tracking substantially stronger than expected,” wrote Morningstar equity analyst Jing Jie Yu in a recent note. The AI infrastructure buildout has created insatiable demand for semiconductors. SK Hynix has ridden the AI wave to a market value exceeding $1 trillion, up from $64 billion at the start of 2025. The company even listed its shares in the US, while Morningstar analysts highlight the risks of leveraged ETFs that offer twice its daily performance.

Add in Taiwan Semiconductor Manufacturing TSM and fellow Korean technology behemoth Samsung Electronics 005930, and you get an AI-heavy emerging-market equity universe. In 2026, that has boosted returns. Emerging-market stocks, which include Taiwan and South Korea by Morningstar Indexes’ definition, have posted big gains in 2026. Developed markets outside the US, which are dominated by Europe and Japan, have actually lagged a bit.

In 2025, by contrast, developed markets were on top. European financials like Banco Santander SAN and defense stocks like Rolls-Royce RR. put up triple-digit gains in 2025. Currency dynamics benefited developed markets more than emerging. This year, the US dollar has appreciated against the euro and other currencies, which has muted gains from a US-investor perspective.

Don’t get me wrong: there’s AI exposure within developed markets too. ASML ASML of the Netherlands, which makes semiconductor manufacturing equipment, is the largest constituent of our developed international stock index. Japanese companies Tokyo Electron 8035 and Advantest 6857 are also key AI beneficiaries.

But at the index level, developed-market equities outside the US bear less resemblance to the US market than their emerging counterparts. For one thing, they are a diffuse universe. For another, financial services is their largest sector.

Emerging markets, by contrast, are top-heavy and tech-heavy. As of June 30, the 10 largest emerging-market stocks represented one-third of index weight. That’s an identical level of concentration to the US equity market.

Note the low price/earnings ratio of the emerging markets index, though. That reflects a persistent discount for the asset class coming off years of underperformance. Political risk surrounding Taiwan doesn’t help either, nor do memories of Chinese government intervention a few years back that undermined companies like Alibaba BABA and Tencent TCEHY. The whole reason SK Hynix listed its shares in the US was to take advantage of higher valuations.

What’s the Near-Term Outlook for International Stocks?

Helpfully, my colleagues at Morningstar Equity Research publish quarterly market outlooks. Their analysis falls along regional lines, as opposed to segmenting emerging and developed markets.

At a high level, the team sees opportunities for equities in the US, Europe, and Asia—but views are nuanced. “Concentration in the US market has continued to climb to new heights, especially over the past two years as the AI buildout boom sends AI-related stocks to new historical highs,” write the team, noting that, as a group, US smaller caps offer more upside potential than larger caps. The team sees attractive valuations in less-loved areas, including software.

European software stocks are also identified as attractive in the team’s regional outlook, with global players SAP SAP and RELX RELX, highlighted. In another echo of the US, the analysts see more opportunity lower down the European market capitalization spectrum. Consumer stocks LVMH MC and Diageo DGE are also seen as undervalued. “European equities offer marginal upside,” concludes the outlook.

Meanwhile, “outside of the technology sector, Asian equities are reasonably attractive,” write my colleagues covering the region. Noting that “share prices are rich” in AI-related areas, they highlight other opportunities across the region and spanning sectors. Examples include Chinese and Japanese healthcare stocks, as well as Singaporean REITs.

The Long-Term Case for Global Exposure Remains Strong

Expert forecasts compiled at the start of the year by my colleague Christine Benz consistently expected higher returns from international stocks for the next seven to 10 years. Market leadership has gone through cycles historically. In the first decade of the 2000s, and before that in the 1970s and much of the 1980s, international stocks led.

To me, the US share of global equity market value is a cause for concern. It currently exceeds 60%, up from 40% in 2008. That’s well out of proportion to the US share of the global economy at roughly 25%. While those numbers need not align, they feel out of whack.

On a related note, the so-called Buffett Indicator is also flashing red. It measures the equity market value/GDP ratio. The total market capitalization of the Morningstar US Market Index hovered around $70 trillion as of June 30, 2026. That’s more than double the $32 trillion size of the US economy. For historical reference, the ratio approached 200% during the 1999-2000 internet bubble and fell below 70% during the 2008 global financial crisis. While no one ratio is indicative, and timing the market is a fool’s errand, the Buffett indicator is certainly an argument for global diversification.

So too is broadening the investment opportunity set. Reading through the Morningstar Equity outlooks, I learned about European financial technology innovation and the electric vehicle boom in China. What’s more, the Japanese stock market has come back to life; Brazil is home to some very strong companies; and the Indian economic growth story remains compelling. I want all of that in my portfolio. Regardless of near-term performance swings, I’m sticking with a strategic global equity allocation.

Do you invest globally? Have you made changes to your allocation? I always love hearing from readers at dan.lefkovitz@morningstar.com. I read all my emails, even if I can’t reply to all.