Outline:
It’s difficult to envision valuation metrics painting a more pessimistic picture for U.S. stocks than they currently do.
International stocks nearly doubled the performance of the S&P 500 in 2025 — and it’s likely they will maintain their strong momentum in 2026.
This is a positive outlook for those of you who wish to keep a significant portion of your investments in stocks but are concerned about U.S. stocks due to their high valuation. On average, non-U.S. stocks offer much stronger value.
Numerous U.S. investors remain unaware of the strong performance of non-U.S. stocks in 2025, as U.S. financial news has primarily focused on the “Magnificent Seven” and the AI sector. However, this contrasts with the S&P 500’s 16.3% total return year-to-date through December 26, while non-U.S. stocks achieved a 33.1% return, as reported by the MSCI All-Country World ex-U.S. index.
Some of this superior performance resulted from the weakening U.S. dollar, which increases the return in dollars for non-U.S. stocks. However, on average, non-U.S. equities are still much more affordable compared to U.S. stocks. Therefore, even if the dollar doesn’t fall in 2026, non-U.S. equities remain a stronger choice to outperform the U.S. stock market.
This can be best understood by examining the cyclically adjusted CAPE ratios of various stock markets. These ratios are determined by dividing a stock market’s index value by the average inflation-adjusted earnings of its constituent companies over the past 10 years. (This metric gained prominence in the 1990s through warnings from Yale University finance professor Robert Shiller regarding investors’ excessive optimism.)
According to data gathered by Barclays Indices, the U.S. CAPE ratio exceeds that of twenty-four other countries being tracked. The average CAPE ratio for those other countries is just slightly more than half of the U.S. figure.
Overvaluation warnings
The price-to-earnings ratio is among 10 valuation metrics that I revise on a monthly basis. Each was selected due to its statistically meaningful capacity to predict the S&P 500’s inflation-adjusted total return over the following ten years. All 10 measures convey a comparable message regarding significant overvaluation in the U.S. stock market.
The table above presents the most recent values for each of these 10 indicators. A 100% value in the three rightmost columns of the table indicates that the stock market is currently more overvalued than it has been in previous periods of U.S. history. The average of the percentages shown in those columns is 98%. It’s difficult to envision these indicators conveying a more pessimistic outlook than they are doing at this time.
What is the more reliable choice: that U.S. stocks in 2026 will continue to go against expectations by increasing despite significant overpricing, or that the much more affordable international stocks will outperform?
Mark Hulbert frequently contributes to . His Hulbert Ratings monitors investment newsletters that pay a fixed fee for verification. You can contact him atmark@hulbertratings.com
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