Why International Equities, Not the U.S., Could Lead Global Markets in 2026

The global investment landscape is undergoing a seismic shift. For much of the past decade, U.S. equities-particularly large-cap tech stocks-dominated global returns. However, 2025 marked a turning point: international stocks outperformed their U.S. counterparts by a wide margin, returning 26% year-to-date as of late November 2025, while the U.S. dollar weakened by 8% against major currencies. This trend is not a temporary anomaly but a structural rebalancing driven by undervalued international markets, fiscal stimulus in Europe and Asia, and the evolving dynamics of the AI supply chain. For investors seeking to reallocate capital in 2026, the case for international equities is compelling.

Dollar Weakness and Valuation Arbitrage

The U.S. dollar's decline has been a critical catalyst for international equities. A weaker dollar reduces the cost of foreign assets for U.S. investors, effectively boosting returns when converted back to dollars. According to Fidelity portfolio managers, this dynamic has made non-U.S. stocks-which trade at a 35% discount to U.S. equities in terms of forward price-to-earnings (P/E) ratios-particularly attractive. For example, European and Japanese equities, which have historically traded at significant discounts to U.S. benchmarks, now offer compelling value propositions. T. Rowe Price analysts note that this valuation gap is among the widest in decades, creating a "reversion to the mean" opportunity as global investors rotate into undervalued markets.

Fiscal Stimulus and Structural Reforms

Europe and Asia are emerging as engines of growth in 2026, fueled by aggressive fiscal and structural reforms. In Germany, stimulus packages targeting infrastructure and defense spending are expected to boost corporate earnings and economic activity. Similarly, Japan's corporate governance reforms-driven by a focus on shareholder returns and productivity-have enhanced the appeal of its equities. Fidelity highlights Japan's "attractive valuations" and its role in the AI supply chain, particularly in semiconductors and robotics. Meanwhile, emerging markets like India and Brazil are benefiting from demographic tailwinds and policy-driven reforms, with T. Rowe Price identifying these regions as "tactical opportunities" amid softer regulatory environments.

AI Supply Chain Dynamics: Beyond the U.S.

The AI revolution, once centered on U.S. tech giants, is now a global phenomenon with significant implications for international equities. While U.S. firms like NVIDIA and Microsoft remain dominant in digital AI (software and models), the physical infrastructure required to support AI-semiconductors, energy, and cooling-is driving demand in international markets. For instance, Taiwan Semiconductor Manufacturing Co. (TSMC) and South Korea's SK Hynix are critical players in advanced chip manufacturing, a sector expected to see sustained capital expenditures through 2026.

Emerging markets are also positioning themselves in the AI value chain. China's advancements in domestic chip technology and AI model development, coupled with India's growing role in AI-driven services, are reshaping global supply chains. Fidelity notes that the energy demands of AI infrastructure-particularly for data centers-are spurring investments in utilities and natural gas, sectors where international markets offer more attractive valuations than their U.S. counterparts.

Diversification and Risk Mitigation

The U.S. market's bifurcation-where AI-driven sectors outperform while rate-sensitive industries lag-has created a concentration risk. T. Rowe Price warns that this divergence could amplify volatility in 2026, particularly if AI adoption slows or regulatory scrutiny intensifies. By contrast, international equities offer a more diversified exposure. European banks are rebuilding balance sheets and increasing dividends as the European Central Bank normalizes interest rates. In emerging markets, sectors like consumer discretionary and industrials are poised to benefit from improving inflation control and fiscal stimulus.

Conclusion: A Strategic Reallocation

For investors, the case for rebalancing portfolios toward international equities is clear. The combination of dollar weakness, fiscal stimulus, and AI-driven supply chain dynamics creates a multi-faceted opportunity set. While U.S. equities remain strong in AI and technology, their valuations are stretched compared to international markets, which offer both growth potential and downside protection. As Global X, Fidelity, and T. Rowe Price all emphasize, 2026 is a pivotal year for global diversification-a shift that could redefine long-term returns for forward-looking investors.