International Stocks: Assessing the Priced-In Rally and the Case for SCHY

The global stock market delivered a historic performance in 2025, setting a high bar for the year ahead. The MSCI All Country World Index climbed over 21% for the year, hitting a record high. This surge was powered by a dramatic shift in leadership, as international stocks outperformed the US by nearly 15 percentage points. For a decade, US equities had been the consistent global leader; this reversal was a notable break from a long-standing pattern.

That stellar rally has fundamentally altered the market's setup. The strong gains have left global equity valuations at historically high levels across all regions, according to Goldman Sachs Research. In other words, the market has already priced in a significant amount of good news. The prevailing sentiment is one of cautious optimism. Analysts like those at Goldman see a broadening bull market ahead, supported by global economic growth and earnings. Yet the forecast for 2026 is notably more modest, with expected returns of around 11%-a clear step down from last year's explosive advance.

This performance gap within the global market is stark. While the world index soared, individual country returns diverged wildly. Colombia emerged as the world's best performer, with its equity market surging more than 91%. At the other extreme, Denmark's stock market fell by more than 13%, making it the weakest performer globally. This chasm highlights a market defined by concentrated momentum and sharp regional differences, where the "global" story masks significant underlying volatility and risk. The new reality is one where the easy money from broad reflationary forces may be fading, and the focus is shifting to which specific markets and sectors can deliver durable growth from these elevated starting points.

SCHY's Niche: A High-Yield Strategy in a Valuation-Adjusted Market

The SCHY ETF has been a standout performer in the recent rally, posting a year-to-date return of 33.99%. That gain not only matches its one-year return but also outperformed its benchmark index, the Dow Jones International Dividend 100, which was up 33.18% over the same period. This strong run underscores the appeal of its strategy: targeting high-dividend-yielding stocks in developed and emerging markets outside the US. The fund's approach is to invest in companies with a proven track record of payouts, a screening process that aims for fundamental strength and lower volatility. In a market where the broad global index has already priced in a lot of optimism, this focus on income and stability offers a potential buffer.

The fund's expense ratio of 0.08% is a notable positive, especially in a valuation-adjusted market where every basis point of cost matters. This low fee structure directly supports long-term returns, giving the strategy a cleaner path to capturing its underlying index's performance. However, the key question is whether this high-yield niche still offers a compelling risk/reward proposition after such a powerful move.

The market's recent performance has been a double-edged sword for SCHY. On one hand, the fund's outperformance suggests its strategy resonated with investors seeking yield during the rally. On the other, the broader market's leap to historically high valuations means that even high-quality, dividend-paying stocks are not immune to re-rating pressure. The fund's focus on companies with sustained dividend histories may provide some resilience, but it does not guarantee that current prices are cheap. The strategy's success now hinges on whether these stocks can continue to deliver both income and capital appreciation from these elevated levels, or if the rally has already priced in their durability.

The bottom line is that SCHY represents a specific, well-defined bet on international value and income. Its recent outperformance and low cost are strengths. Yet, in a market where the global bull run has set a high bar, the fund's high yield may be more of a consolation prize than a catalyst. The risk/reward now appears more balanced, as the easy money from broad reflation may be fading. For investors, the choice is whether to own the high-yield segment of the rally, or to wait for a clearer opportunity to buy that same quality at a more attractive price.

The Expectations Gap: Can the Rally Continue?

The market's current setup presents a classic expectations gap. After a historic 21% rally in 2025, the forward view is one of steady, earnings-driven growth rather than another explosive advance. Goldman Sachs Research forecasts global stocks to return 11% over the next 12 months, a notable deceleration from last year's gains. This forecast, which includes dividends, is squarely in line with the broader economic backdrop of sturdy global growth of 2.8% in 2026. In other words, the optimistic outlook for the global economy is already priced in. The market is not being rewarded for macroeconomic optimism; it is being asked to deliver on it through corporate profits.

This shift in drivers is critical. With valuations at historically high levels across all regions, the easy money from rising multiples has likely been made. The forecast for 2026 suggests returns will be more earnings-driven rather than valuation-driven. This is a subtle but important pivot. It means the market's focus is moving from broad, reflationary gains to a more granular hunt for companies where fundamental profit growth can outpace expectations. The theme of diversification, which rewarded investors in 2025, is expected to continue-but now extending across investment styles and sectors, not just geography.

Yet this transition introduces new risks. The primary vulnerability is a valuation reset, particularly in markets like Europe where valuations may be stretched. The market's optimism phase, as identified by Goldman Sachs, typically sees rising valuations and carries upside risks. But it also sets the stage for a potential pullback if earnings disappoint or if the economic growth narrative falters. Furthermore, the persistent performance gap between the world's best and worst performers-like Colombia's 91% surge versus Denmark's 13% drop-suggests that dispersion will remain a defining feature. This could mean continued volatility as capital flows into specific winners, leaving others behind.

The bottom line is that the rally can continue, but the path is likely to be more bumpy and selective. The market has already priced in a positive macro story. The next leg of the bull market will depend on corporate earnings meeting or exceeding these elevated expectations. For investors, the risk/reward now hinges less on global optimism and more on the ability to navigate a market where the easy money from broad diversification is fading, and the focus is squarely on finding durable growth within a valuation-adjusted landscape.

Catalysts and Risks: What to Watch for the Thesis

The investment thesis for SCHY and international equities hinges on a few critical catalysts and a clear understanding of the asymmetry of risk. The market has already priced in a positive macro story, so the focus now shifts to whether corporate fundamentals can meet the high expectations set by last year's performance.

First and foremost, investors must watch for earnings growth in international markets to meet or exceed the elevated expectations. With valuations at historically high levels across all regions, the forecast for 2026 suggests returns will be driven more by fundamental profit growth rather than by rising valuations. This is the primary catalyst. If multinational corporations can deliver robust profit expansion, it could support the broadening bull market Goldman Sachs expects. However, if earnings disappoint, the risk of a valuation reset increases, particularly in markets like Europe where multiples may be stretched. The thesis assumes that the "steady, earnings-driven growth" forecast is achievable; the catalyst is proof that it is.

Second, monitor geopolitical tensions and economic data from key regions for signs of divergence. The global outlook is sturdy, but growth is not uniform. For instance, China's economy is expected to grow 4.8% in 2026, a figure that will be watched closely for any signs of a slowdown. Similarly, economic data from Europe and other developed markets will signal whether the forecast for "modest" gains holds. The stark performance gap seen in 2025-where Colombia surged over 91% while Denmark fell more than 13%-suggests that dispersion will remain a defining feature. Capital flows into specific winners could drive volatility, making regional economic data a key early warning system for the thesis.

The primary risk, however, is that SCHY's high yield is not sustainable if global growth slows or valuations compress further. The fund's strategy targets income, but that income is derived from companies whose earnings and stock prices are tied to the same macroeconomic forces. If the global economy falters or if the market's optimism phase ends, the combination of lower dividends and falling prices could limit total returns. The fund's low expense ratio is a positive, but it does not insulate it from these broader pressures. In this scenario, the high yield becomes a consolation prize, not a catalyst, and the risk/reward ratio deteriorates.

The bottom line is that the catalysts are earnings and regional growth data, while the key risk is a failure of fundamentals to support elevated valuations. For SCHY, the thesis is not about chasing the next leg of the broad rally, but about whether its high-yield niche can deliver durable returns from these new, more selective starting points.