INSIGHTS

On August 03, 2026

AAM Viewpoints — Playbook for the New International Cycle

Investors and the financial media seem to be overlooking what may be the most significant cycle shift in the past 20 years, which could require a new “playbook.” U.S. strategies (generally growth oriented) — which have dominated since the Great Financial Crisis (GFC) — have begun to underperform many international strategies, which we view as indicative of a regime change that could last for some time to come.

Recent headlines have continued to highlight the strong performance of artificial intelligence (AI)-related stocks. However, what is often missed is that leadership within these themes has shifted toward value-oriented companies. More specifically, while the “Magnificent 7” led the market through last year, recent leadership has generally come from lower-multiple international semiconductor firms and industrial companies supporting AI infrastructure. In fact, many former leaders within the Magnificent 7 are now quietly underperforming the MSCI ACWI ex-US Index. This shift is reflected more broadly in index performance. The MSCI ACWI ex-US Index has outperformed the S&P 500 year-to-date and past 18 months (ending 6/30/26), suggesting that the first sustained international cycle in two decades is already underway.

Changes in several underlying secular trends have been supporting this transition and driving investors to reconsider value-oriented opportunities. Evidence of this shift includes:

• Globalization evolving into “Slowbalization,” as developed economies pursue reshoring and “friend-shoring.” This has led to a new capital investment cycle.
• The multi-decade decline in interest rates, from the peaks of the 1970s to the troughs during COVID, has ended with rates now structurally higher.
• The disinflationary backdrop driven by globalization and post-Cold War stability has reversed, resulting in structurally higher inflation.
• The strong dollar trend in place since the GFC appears to be reversing toward a weaker dollar environment.
• Developed market governments have shifted to stimulus from austerity, driven by rising infrastructure and defense spending needs.

As these secular forces evolve, market leadership has shifted in favor of international strategies. Over the past 30 years, developed markets have increasingly sent production offshore to the lowest-cost reliable manufacturers. The rise in populist movements is, in part, a consequence of this trend, as many workers have faced diminished economic mobility. This political and economic backdrop, combined with rising geopolitical risks, has led governments to more aggressively pursue fiscal stimulus aimed at increasing corporate investment and strengthening national security. When paired with the supply chain disruptions exposed during COVID and targeted industrial policies, this has triggered a reversal of long-standing underinvestment in domestic manufacturing. At the same time, AI-driven demand has been accelerating the need for materials, skilled labor, and the infrastructure required to build and operate data centers and increase manufacturing capacity.

The combination of these forces points toward a structurally higher inflation environment and, more broadly, higher real interest rates. This typically favors lower multiple stocks, as the discounted cash flows that investors are paying for are realized in a shorter time than for their expensive counterparts. These dynamics support sustained demand across many themes. We believe developed markets are entering a new capital investment cycle and favor materials, industrials, and energy companies positioned to benefit. We also expect continued growth in AI-related investment, favoring semiconductors, servers, data centers, and consulting services. The application of AI presents both opportunities and risks across software and service businesses. Higher interest rates and a more favorable regulatory backdrop could create improved conditions for banks and capital markets firms. In addition, a weaker U.S. dollar may support healthcare companies, particularly in pharmaceuticals and medical devices. Finally, the global political environment is less stable than in the post-Cold War era, so defense spending is likely to remain elevated for the foreseeable future.

Markets move in long cycles, often lasting a decade or more, during which one investment style leads. We believe a cycle transition is now underway to international from the U.S. and while investors are often slow to recognize these shifts, they tend to ultimately adjust.

CRN: 2026-0803-13666 R

“Magnificent 7” refers to a group of seven highly influential, mega-cap US technology companies whose market performance frequently dictates market trends. These stocks are Meta, Microsoft, Apple, Amazon, Tesla, NVIDIA and Alphabet.

The opinions and views of this commentary are those of Todd Asset Management as of July 24, 2026 and are not necessarily those of Advisors Asset Management.