Worried About an AI Bubble? Look to Surging International Stocks

U.S. stocks continue to climb the wall of worry and post new records. The S&P 500 Index  (SPY) is now up more than 17% year to date and is on track to achieve double-digit returns for the third consecutive year.

International stocks have done even better. The MSCI All Country World ex USA Index is up about 30% and on pace for its widest outperformance against broad U.S. indexes in 16 years, according to WSJ. U.S. stocks have generally outperformed their international peers since the global financial crisis, except for brief periods in between, such as in 2022.

Supersized gains in U.S. stocks have been driven mainly by AI enthusiasm, and now many critics are warning about a potential AI bubble. That has led many investors to look toward international stocks, which are much more attractively valued.

The U.S. dollar is down about 9% this year, helping boost returns on foreign indexes in dollar terms. Dollar weakness has resulted from tariff and trade-related uncertainty, a rising fiscal deficit, and growing concerns about the Federal Reserve’s independence.

The outlook for U.S. stocks remains positive, given that the economy and corporate earnings are growing at a faster pace than most of the rest of the world. The U.S. also leads in the AI space, and the rest of the world does not have innovative companies like NVIDIA (NVDA), Microsoft (MSFT), and Alphabet (GOOG).

Still, since most investors have a “home country bias,” some allocation to international stocks makes sense for diversification. To learn more about the Vanguard Total International Stock ETF (VXUS), iShares MSCI Intl Value Factor ETF (IVLU), and Cambria Global Value ETF (GVAL), please watch the short video above.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research