MW Trump's tariffs could make international stocks more attractive than U.S. investments. Here's why.

By Isabel Wang

Tariffs may disproportionately affect U.S. companies compared with their smaller international counterparts, market analysts say

U.S. investors are looking abroad in pursuit of higher stock-market returns amid fears that elevated valuations of megacap technology titans and the uncertainty surrounding President Donald Trump's proposed tariffs could limit future gains on Wall Street, boosting the appeal of foreign equities.

After trailing U.S. stocks in 2024, international equities have elbowed past their American peers in terms of stock-market performance so far in the new year. European stocks have been on a hot streak, with the STOXX Europe 600 index up 7.3% this year in U.S. dollar terms as of Tuesday, and the FTSE 100 UK:UKX up by more than 6% in the same period, according to Dow Jones Market Data.

Stocks in emerging markets have also caught up to their U.S. counterparts, with Hong Kong's Hang Seng index HK:HSI popping 5.6% in dollar terms as of Tuesday. The iShares MSCI China MCHI and iShares MSCI Emerging Markets EEM exchange-traded funds were up 7.9% and 4.1% in the same period, respectively. Those gains are all well above the 3% gain in the S&P 500 SPX so far this year, according to FactSet data.

Notably, the $39 billion Vanguard FTSE All-World ex-U.S. ETF VEU, which tracks companies in Europe, Canada and the Pacific and in emerging markets, has gained 5.1% in the year to date. The ratio between VEU and the S&P 500 also reached a year-to-date high earlier this week, suggesting that global equities have significantly outperformed U.S. stocks this year - and that could mark the beginning of a reversal in the 15-year trend of global stocks underperforming relative to the U.S., said Jonathan Krinsky, chief market technician at BTIG (see chart below).

"While that [15-year trend] means fighting this trend has been futile, we are seeing international markets act much better [this year] while some areas of U.S. megacaps are showing vulnerability," Krinsky said.

See: U.S. stocks dominated global markets in 2024 - why they likely won't in 2025

A surge in the European banking sector has been a key driver of the region's stock-market gains in 2025, said Kathleen Brooks, research director at XTB. Spanish Banco Santander's American depository receipts $(SAN)$ have jumped nearly 28% this year, while Société Générale's ADRs $(SCGLY)$ have surged over 36% in the same period, according to FactSet data.

Similarly, in emerging markets, the outperformance of China-related ETFs has been largely fueled by ADR shares of U.S.-listed Chinese tech giants such as Alibaba Group Holding Ltd. $(BABA)$, JD.com Inc. $(JD)$ and Baidu Inc. $(BIDU)$.

"What we're seeing is money flowing into Europe and emerging markets and Asia in particular at the beginning of the year, so there's an expectation that those indexes will play catch-up to the U.S. in 2025," Brooks told MarketWatch in a phone interview on Tuesday. "If investors are just ignoring the political noise, the valuations [of global equities] are so attractive."

Indeed, one major draw of international stocks is that they look much cheaper compared with their U.S. counterparts. The S&P 500 traded at 22 times forward earnings as of Tuesday, while the STOXX 600 traded at 14.13 times and the iShares MSCI China ETF traded at 15.75 times forward earnings in the same period, according to FactSet data.

"U.S. stocks are not at their highest valuation ever relative to their history, but they have never been more expensive than they are now against international stocks," said Phillip Wool, chief research officer and lead portfolio manager at Rayliant. "The disparity is really pronounced and would tend to predict over the longer term that we're likely in for a period of international outperformance."

Wool also said that potentially strong earnings growth for U.S. companies in 2025, along with Trump's pro-growth policies such as deregulation and tax cuts, will remain as a tailwind for American stocks, but "a lot of that good news has already been priced in since last year," he noted.

"We expect earnings growth will be strong for U.S. stocks this year, but we also expect strong earnings growth for emerging markets. ... Then you ask, where do I pay less for that earnings growth? I think that's certainly in emerging markets today," Wool told MarketWatch via phone.

See: European stocks are beating the U.S. so far this year. Is American exceptionalism dead?

Tariffs may affect U.S. companies more than their smaller E.U. counterparts

Trump earlier this week announced new 25% tariffs on steel and aluminum imports globally, but it is unclear if the president will target European countries with additional tariffs, as he has done with Canada, Mexico and China.

"European countries seem to be ready to slap tariffs on to remind the U.S. that the European Union is a much bigger trading bloc and economy than America, so they're willing to use retaliatory tariffs because that will inflict economic pain on the U.S. - and tariffs could be as bad for American as it is for Europe," Brooks said.

See: Worried Trump's aluminum tariffs will raise prices on canned drinks and metal appliances? Here's what to expect.

That's why, despite the volatile swings in the U.S. stock market last week, Trump's tariff plans "have yet to spark panic anywhere" in Europe, Brooks said. "There is an expression of the market being concerned about tariffs, but we haven't seen the euro $(EURUSD.FOREX)$ slam down to parity on the back of these threats," she added.

It's also worth noting that the impact of Trump's tariffs might disproportionately affect U.S. companies relative to their smaller European counterparts, as European tech companies don't usually derive a substantial portion of their revenues from overseas or face similar tariffs with countries like China, Brooks said.

As a result, U.S. companies such as Apple Inc. $(AAPL)$ and Nvidia Corp. $(NVDA)$, with 10% to 20% of their revenue tied to China, face heightened vulnerability to Trump's tariffs, the analyst said.

"It's still not clear that Trump's tariffs are bad for the rest of the world and certainly good for the U.S. In fact, they're quite bad for the U.S. blue-chip indexes," she added.

See: Hot inflation report, rising Treasury yields warn the market's bull run could be in trouble. Here's how to read it.

U.S. stocks were mostly lower on Wednesday afternoon as concerns about inflation making a comeback gave investors a scare. The Dow Jones Industrial Average DJIA was falling 0.5%, while the S&P 500 was off 0.3% and the Nasdaq Composite COMP was flat, according to FactSet data.

-Isabel Wang

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February 12, 2025 15:00 ET (20:00 GMT)

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