INSIGHTS

On January 26, 2026

AAM Viewpoints — Strategic Resilience

Global equity markets have been undergoing a meaningful shift as international stocks took the lead in 2025. Many overseas economies appear to be early in their growth cycles, fueled by stimulative policies. Faster economic growth, improving corporate earnings, and compelling valuations create a powerful case for investors to look beyond U.S. borders. More specifically:

International markets soundly beat the U.S. last year, and we expect that trend to continue.

These markets appear to be entering a secular bull phase that could last for years, driven by structural economic changes and a shift toward pro-growth fiscal policies. The End of Austerity narrative has been turning into Strategic Resilience, something even more powerful. The aftermath of COVID as well as the war in Ukraine have pushed many Western democracies to move away from austerity and seek resilience by investing in areas like defense, infrastructure, and reshoring. We see this as a lasting transformation, not a temporary rally…one that should support faster growth, stronger earnings, and a closing of the valuation gap with U.S. markets.

Economic Growth

Global growth remained ahead of expectations and looks poised to stay there. Inflation is now under control across most developed markets, with China even seeing producer price deflation. Europe still has unspent COVID recovery money, while new defense and infrastructure funds are in the pipeline as well. Japan’s newly elected prime minister favors stimulative policies reminiscent of former PM Abe’s approach. China and other Asia Pacific economies continued to grow at steady 4%+ rates. As trade tensions ease and tariff uncertainty fades, global visibility has been improving, and much of the world now feels early in its economic cycle.

Central Bank Policy Rates

Most central banks appear to be starting gentle easing cycles as inflation settles near their target rates. Japan is the main exception where policy rates are normalizing higher. With the U.S. Federal Reserve now cutting rates, many emerging markets have followed suit, which helped fuel their strong equity performance in 2025. China has taken a moderately loose stance, using reserve requirements and interest rates to encourage domestic demand.

Long-Term Interest Rates

Long-term yields have been rising across most international markets. Generally, rising rates reflect healthy growth prospects and firm funding demand. Ten-year yields in Japan, Germany, France, and Australia are testing new highs, signaling a pro-cyclical environment. The M&A (mergers & acquisitions) market is also expected to heat up this year, which could support increased demand for both private and public credit.

Earnings Growth

Earnings forecasts in Europe and Emerging Markets have continued to improve and, in some cases, accelerate relative to the U.S. However, American companies still show the most consistent upward revisions — a reminder that while international markets may lead in momentum, the U.S. remains a powerhouse in earnings stability.

Technical Outlook

The MSCI ACWI ex-U.S. Index broke out in May 2025 after being range-bound since 2007, a move that has often signaled a multi-year uptrend. U.S. 10-year yields remain stable while short rates have been easing, in contrast to international markets where long-term rates have been climbing. The U.S. dollar remains weak, gold and other precious metals prices have been surging, and oil has continued to trend lower. Industrial commodities have been mixed, though copper — the traditional barometer of global growth — remained strong. While powerful bullish runs in precious metals can eventually pressure equities, we don’t think we’re at that stage yet given the current decline in oil prices.

Valuation

Non-U.S. equity markets are attractively priced relative to the U.S., trading around their long-term average price-to-earnings multiples since 2006. By contrast, U.S. equities generally remain expensive. As international economies adopt pro-growth policies, we expect the valuation discount to continue narrowing over time. Valuation is a blunt instrument and a long-term measure, so this view is more structural than short-term.

Politics

Geopolitical risk remains elevated. Conflict has reemerged in the Middle East, peace in Europe is still elusive, and global tensions were further stirred when the U.S. arrested the leader of a sovereign nation. Across Europe, governments are grappling with decisions over defense, infrastructure, and social spending, leading to widespread political turnover. France alone has seen five prime ministers since 2024. Developments in Iran bear watching. In the global “big picture,” it looks like there has been a major power shift in the Panama Canal, Syria, Venezuela and Iran that has meaningfully reduced China's sphere of influence over the past year and a half.

International Stocks have been leading as markets shifted their preferences away from largest cap U.S. technology stocks in favor of areas that could potentially benefit from the secular trends towards Strategic Resilience. We believe US Dollar weakness, renewed fiscal stimulus, the encouraging of longer working lives, pro-growth policies and renewed investment in local economies could allow this outperformance to continue.

Many investors still have significant concentration in the previous leadership of U.S. large cap technology stocks. As we see continued weakness in this area, the benefits of diversification will become more visible, and we like adding to other disciplines including those with more emphasis on International and Value investing.

CRN: 2026-0116-13136 R

The opinions of this piece are those of Todd Asset Management and are not necessarily those of AAM.