Home Bias Could Be Costly for US Equity Investors

Are we seeing a regime change

When it comes to their equity portfolios, US investors have historically exhibited a high degree of home-country bias. But in today’s fast-changing global market landscape, they may find that there are good reasons to rethink regional allocations to stocks.

International equities accounted for just 15% of total US investor assets through April, according to Morningstar, a fund tracking firm. There are reasons for this. US equities trade in a deep single market with a single currency and ample exposure to growth, value, and income. And for the last decade and a half, US stocks have comfortably outperformed.

US Stocks Don’t Always Outperform

But widen the lens and it becomes clear that US and non-US stocks have traded periods of outperformance over the last 50 years at irregular intervals (Display). The most recent run of US dominance ended in 2021. Between October 2022 and May 2023—a particularly strong stretch for non-US stocks—the MSCI EAFE Index of developed-market stocks outside the US and Canada delivered a net return of 26.2%, outpacing both that of the MSCI USA (13%) and the S&P 500 (13.3%).

Here are three reasons why we think it’s time for US investors to start looking further afield for equity return potential.

First, US dollar depreciation—partly the result of easing US inflation pressure—should support select companies and stocks outside US borders. A weaker dollar has in the past correlated with non-US stock outperformance. It also boosts returns for US investors who own non-US stocks, which are worth more when converted back to dollars.