Portfolio managers investing in non-U.S. stocks have been trying to get investors’ attention for years, pointing out that valuation multiples overseas have grown much cheaper than stocks in the U.S. since the Financial Crisis, and this year their patience has finally been rewarded.
The MSCI EAFE index, covering stocks in 21 developed markets excluding the U.S. and Canada, is up 7% this year, significantly outperforming the 7% decline for the S&P 500 index in the U.S. It represents a small dent in the decades-long disparity between the two—JPMorgan reports that from the second half of 2008 through the end of 2024, the S&P 500’s annualized total return was 11.9%, versus 3.6% for the MSCI EAFE. That amounts to a seven-fold return on investment for the former, while the international portfolio hasn’t even doubled.
Some of that dominance is because U.S. stocks have produced much stronger earnings growth, but some is also because the S&P 500’s average P/E multiple has swelled to 21.7x, while EAFE is only at 14.0x after starting in a similar position, according to the JPMorgan report. With fears swirling that tariffs and broader uncertainty will compress earnings in the U.S., international investors are hoping that gap can narrow even more.
Asset management giants like Vanguard, BlackRock and Franklin Templeton offer dozens of low-cost international funds to choose from. Active managers that are outperforming the indexers are primarily doing so by zeroing in on European defense stocks and domestically-focused companies that are perceived to be insulated from the effects of Trump’s tariffs in nations like Japan and China.
“We’re at the lowest relative weight of the U.S. in quite some time,” says Travis Prentice, chief investment officer of the Informed Momentum Company, which manages $2.5 billion in momentum-based strategies. “In aerospace and defense, particularly in Europe, momentum not only persisted, but accelerated through all this tariff turmoil.”
Graeme Forster, a portfolio manager at Orbis overseeing $4.5 billion in its International equity strategy, agrees, singling out airplane engine maker Rolls-Royce, London-based BAE Systems, Europe’s largest defense contractor, and German defense firm Rheinmetall as good bets. Orbis’ international strategy has returned 10.8% annually since inception at the end of 2008, beating its index by four percentage points, and produced a 10% return net of fees in the first quarter this year.
Rolls-Royce and BAE Systems are each up more than 30% this year already. Rheinmetall has soared 150% thanks largely to the German parliament’s commitment in March to create a fund to spend more than $500 million on defense and infrastructure over 12 years, a stark departure from the nation’s longstanding frugal spending policies.
Trump has been critical of NATO on several occasions, attacking European nations for not paying enough to support the alliance, and paused U.S. military aid to Ukraine in March. That prompted the European Commission to unveil a “Readiness 2030” plan in March enabling $900 million in spending to defend Ukraine and protect themselves from Russia’s aggression. Ursula von der Leyen, the European Commission’s president, cautioned that “the security architecture that we relied on can no longer be taken for granted” and urged nations to “buy more European.” That’s contributed to U.S. defense firm Lockheed Martin, which makes F-35 fighter jets, sinking 15% since Trump’s election, while BAE Systems, which also produces fighter jets, has soared.
“Sometimes there’s news and sometimes there’s noise, and we’ve always had to figure out how to sift through it, but 2025 has been a particularly newsy year,” says Alaina Anderson, portfolio manager for William Blair’s $1.1 billion International Leaders Fund, which recently added positions in BAE Systems and French cybersecurity and defense firm Thales. “It’s been news that speaks to a change in the structure of markets, the nature of relationships between countries and the durability of long-established institutions.”
Anderson’s fund is also adding positions in China despite its status as the chief target of Trump’s trade war, focusing on stocks like Trip.com, the country’s largest online travel company with more than 50% market share within China. “We think there’s low geopolitical risk in that name, given that it’s really domestic-driven consumption,” says Anderson, with the stock up 50% since last August.
Despite Trump’s pressure in ratcheting up tariffs on China to as much as 145%, the Shanghai Composite index has lost a mere 1.6% in 2025. Prentice references Beijing-based electronics firm Xiaomi as one stock with momentum after tripling in the past year. It sells everything from smartphones to electric vehicles and could be poised to benefit if America’s largest tech companies face harsher tariffs on imports into China.
Orbis’ Forster is more enthralled by opportunities in neighboring Japan, where the Nikkei 225 has roughly mirrored the S&P 500’s losses so far this year. The yen has weakened substantially in the last five years, helping Japanese companies hire skilled workers cheaply in U.S. dollar terms, and Forster thinks the prospect of higher interest rates, which the Bank of Japan raised in January to their highest level in 17 years, could counterintuitively stimulate growth.
“Everyone is a massive saver there. Everyone’s paid off their mortgages and they’ve got a ton of money, and it just sits in bank accounts earning zero,” says Forster. From 2016 until last year, Japan had negative interest rates in place, but with inflation finally returning, the rate hikes could make the yen stronger, ease import costs and improve margins for retailers and domestic businesses.
Forster likes real estate firm Mitsubishi Estate’s stock, with a valuable portfolio of real estate which trades at about half of its fair value, Orbis estimates. The developer owns most of the property surrounding Tokyo’s famed Imperial Palace—its stock performance has been middling for decades, but it’s rallied 25% so far this year, with rents rising meaningfully for the first time since Japan’s 1989 market crash.
“The nice thing about a real estate business is as they push up rent, it’s not a wage-heavy business, so they’re not getting squeezed on the cost side,” says Forster. “That could be very sustainable, because real estate is quite cheap in Japan, and you’re getting it at half price.”
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