Performance divergence between U.S. and ex-U.S. equities and rotation themes

Performance Divergence Between U.S. and Ex-U.S. Equities: Rotation Themes and Structural Drivers in 2026

As 2026 progresses, a notable divergence has emerged in the performance of U.S. versus ex-U.S. equities. While U.S. markets have faced headwinds from policy uncertainties, legal challenges, and liquidity constraints, many international markets—particularly in Latin America, Europe, and parts of Asia—are outperforming. This trend is driven by a combination of structural rotation factors, valuation adjustments, and macroeconomic shifts.

Why Are Non-U.S. Stocks Outperforming the U.S.?

Several interconnected factors underpin the relative strength of ex-U.S. equities:

• Weakening U.S. dollar: The dollar has declined approximately 1% year-to-date and 9% over the past 12 months, reducing the dollar's safe-haven appeal and boosting export-driven growth in emerging markets and Europe. This currency trend enhances export competitiveness and attracts capital inflows into regions less impacted by U.S. policy headwinds.

• Regional economic resilience and reforms: Latin America, Europe, and parts of Asia are benefiting from structural reforms, rising commodity prices, and investor interest fueled by global liquidity searching for better yields outside the U.S. These regions are experiencing multi-year high capital inflows, supported by valuation adjustments and more stable monetary policies.

• Market sentiment and regional dynamics: Recent surveys indicate deteriorating confidence in Eurozone services, hinting at looming headwinds. However, valuations remain attractive relative to the U.S., and ongoing reforms are underpinning long-term confidence in these markets.

Structural Rotation Drivers and Valuations

The rotation away from U.S. equities is rooted in macro and policy shifts:

• Peak in global liquidity and tightening monetary policy: Central banks, notably the Federal Reserve, are aggressively tightening to combat inflation, with balance sheet runoff and interest rate hikes constraining liquidity. This environment favors regions with more accommodative monetary policies or fewer policy uncertainties.

• Legal and governance headwinds in the U.S.: Recent reports, such as the Wall Street Journal's coverage of the Fed’s legal challenges against DOJ subpoenas, highlight internal conflicts and transparency concerns. Such issues cloud policy signals, making U.S. assets less attractive amid institutional uncertainty.

• Valuations and forward outlooks: Ex-U.S. markets often offer more attractive valuations—especially in Europe and Latin America—compared to the often overextended U.S. indices. As the macro environment shifts, investors are increasingly factoring in cautious outlooks for U.S. growth and reassessing risk premiums.

The Role of the Dollar and Trade Tensions

The weaker dollar is a key catalyst for regional outperformance. It improves export prospects for emerging markets, which also benefit from rising commodity prices and trade diversification. Conversely, ongoing trade tensions escalated by tariff policies—including recent 15% global tariffs announced by former President Trump on EU, UK, Japan, and South Korea—add volatility and systemic risks, influencing regional flows.

Trade escalations have driven sharp FX swings—notably the dollar's decline—and increased FX volatility, which complicates cross-border investments and heightens systemic vulnerabilities, especially in emerging markets sensitive to dollar dynamics.

Market Responses and Future Outlook

• Regional equity rotation is likely to persist if the dollar remains weak and U.S. policy uncertainty continues. Investors are advised to diversify into resilient markets like Latin America and Europe and employ active hedging strategies to mitigate FX and policy risks.
• Valuation-driven re-engagement in ex-U.S. equities suggests that longer-term fundamentals, such as reforms, commodity cycles, and structural reforms, will support continued outperformance.

Supplementary Insights from Recent Articles

Recent discussions emphasize that global cash flows are fueling Latin American stock rallies, aligning with the broader rotation theme. For instance, the article titled "Global Market | Global cash is fuelling LatAm stock rally" highlights strong investor interest in Latin America amid global liquidity seeking higher yields.

Additionally, the "Great Rotation" narrative underscores that investors are shifting their focus away from U.S. equities towards more attractive, undervalued international markets—a trend reinforced by valuation gaps and structural reforms.

Final Thoughts

The divergence in performance between U.S. and ex-U.S. equities in 2026 reflects broader macroeconomic, policy, and structural shifts. While the U.S. grapples with legal uncertainties, liquidity constraints, and policy ambiguity, international markets—particularly in Latin America and Europe—are benefiting from currency tailwinds, valuation support, and reform momentum.

Investors should monitor currency trends, policy developments, and regional economic signals to navigate this rotation effectively. Strategic diversification into resilient regions, combined with active risk management, will be vital in capitalizing on these evolving opportunities amid ongoing volatility.