The case for investing outside the U.S.
For much of the last two decades, European stocks have been cheaper relative to earnings than American ones. Many believed this indicated better returns and lower crash risks — but they were wrong.
The key reason to consider international markets is the disparity in exposure and valuation between American and foreign firms. About 40% of U.S. company earnings come from abroad, while foreign companies derive 20% of their profits from America, indicating a shared profit landscape.
Despite this overlap, American companies are valued significantly higher relative to earnings than their foreign counterparts. This gap is often attributed to better profit margins and management but raises questions about market valuations based on differing multiples for domestic versus international earnings. With U.S. shares at near-record high valuations, it’s conceivable that a correction could be pending as these discrepancies seem increasingly unjustifiable.
