Personal Finance
Should investors dump U.S. stocks for international equities? Experts weigh in
Some investors accustomed to the dominance of U.S. stocks versus the rest of the world are making a stunning pivot toward international equities, fearing U.S. assets may have taken on more risk amid escalating trade tensions initiated by President Donald Trump.
The S&P 500 sank more than 6% since Trump first announced his tariff plan, while the Dow and Nasdaq have each tumbled more than 7%.
There was a strong argument to dial back U.S. stock holdings and adopt a more global portfolio even before the recent volatility, said Christine Benz, director of personal finance and retirement planning for Morningstar.
“But I think the case for international diversification is even greater 1744909145, given recent developments,” she said.
Jacob Manoukian, head of U.S. investment strategy at J.P. Morgan Private Bank, offered a similar assessment. “Global diversification seems like a prudent strategy,” he wrote in a research note on Monday.
U.S. had the world beat by ‘sizable margin’
Some experts, however, don’t think investors should be so quick to dump U.S. stocks and chase returns abroad.
The United States is still “a quality market that looks like a bargain,” said Paul Christopher, head of global investment strategy at the Wells Fargo Investment Institute.
U.S. stocks had been outperforming the world for years heading into 2025.
The S&P 500 index had an average annual return of 11.9% from mid-2008 through 2024, beating returns of developed countries by a “sizable margin,” according to analysts at J.P. Morgan Private Bank.
The MSCI EAFE index — which tracks stock returns in developed markets outside of the U.S. and Canada — was up 3.6% per year over the same period, on average, they wrote.
However, the story is different this year, experts say.
“In a surprising twist, the U.S. equity market has just offered investors a timely reminder about why diversification matters,” the analysts at J.P. Morgan Private Bank wrote. “Although U.S. outperformance has been a familiar feature of global equity markets since mid-2008, change is possible.”
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The Trump administration’s tariff policy and an escalating trade war with China have raised concerns about the growth of the U.S. economy.
U.S. markets have been under pressure ever since the White House first announced country-specific tariffs on April 2. Trump imposed tariffs on many nations, including a 145% levy on imports from China.
As of Thursday morning, the S&P 500 was down roughly 10% year-to-date, while the Nasdaq Composite has pulled back more than 16% in 2025. The Dow Jones Industrial Average had lost nearly 8%. Alternatively, the EAFE was up about 7%.
Is U.S. exceptionalism dead?
The sharp sell-off in U.S. markets has raised doubts as to whether U.S. assets “are as attractive to foreigners now as they once were and, perhaps as a consequence, whether ‘U.S. [equity] market exceptionalism’ could be on the way out,” market analysts at Capital Economics wrote Thursday.
At the same time, rising global trade tensions have taken a toll on the bond market, threatening to shake the confidence of holders of U.S. debt. The U.S. dollar has also weakened, nearing a one-year low as of Thursday morning.
It’s unusual for U.S. stocks, bonds and the dollar to fall at the same time, analysts said.
Former Treasury Secretary Janet Yellen said Monday that President Donald Trump’s tariffs have made it more difficult for Americans to find comfort in the U.S. financial system.
“This is really creating an environment in which households and businesses feel paralyzed by the uncertainty about what’s going to happen,” Yellen told CNBC during a “Squawk Box” interview. “It makes planning almost impossible.”
The U.S. fire had ‘already been burning’
A trader works on the floor of the New York Stock Exchange at the opening bell in New York City, on April 17, 2025.
Timothy A. Clary | AFP | Getty Images
That said, international and U.S. stock returns tend to ebb and flow in cycles, with each showing multi-year periods of relative strength and weakness.
Since 1975, U.S. stock returns have outperformed those of international stocks for stretches of about eight years, on average, according to an analysis by Hartford Funds through 2024. Then, U.S. stocks cede the mantle to international stocks, it said.
Based on history, non-U.S. equities are overdue to reclaim the top spot: The U.S. is currently 13.8 years into the current cycle of stock outperformance, according to the Hartford Funds analysis.
U.S. markets had already showed weakness heading into the year amid concerns about the health of the economy grew and as “air came out the valuations of ‘big-tech’ stocks,” according to Capital Economics analysts.
“In that respect, ‘Liberation Day’ — which accentuated these moves — only added fuel to a fire that had already been burning,” they wrote.
Advisors: ‘Tread carefully here’
A good starting point for investors would be to mirror a global stock fund like the Vanguard Total World Stock Index Fund ETF (VT), said Benz of Morningstar. That fund holds about 63% of assets in U.S. stocks and 37% in non-U.S. stocks.
It may make sense to pare back exposure to international stocks as individual investors approach retirement, she said, to reduce the volatility that comes from fluctuations in foreign exchange rates.
“Part of our core models for clients have always had international exposure, it’s traditionally part of any risk-adjusted portfolio,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York, of the conversations he is having with his clients.
Financial advisor or business people meeting discussing financial figures. They are discussing finance charts and graphs on a laptop computer. Rear view of sitting in an office and are discussing performance
Courtneyk | E+ | Getty Images
Even though those asset classes didn’t perform as well over the last few years, “they’ve done a pretty good job here of helping reduce the brunt of this tariff volatility,” said Boneparth, a member of the CNBC Financial Advisor Council.
Still, Boneparth cautions investors against making any sudden moves to add non-U.S. equities to their portfolios.
“If you are thinking about making changes now, be careful,” he said. “Do you lock in losses to U.S. stocks to gain international exposure? You want to tread carefully here,” he said. “Are you chasing or timing? You usually don’t want to do those things.”
However, this may be a good time to check your investments to make sure you are still allocated properly and rebalance as needed, he added. “By rebalancing, you can rotate out of less risky assets into equities, strategically buying the dip.”
There have been very few times in history when clients asked about increasing their investments overseas, “which is happening now,” said CFP Barry Glassman, the founder and president of Glassman Wealth Services.
“Given that both stocks and currency are outperforming U.S. indices it’s no wonder there is greater interest in foreign stocks today,” said Glassman, who is also a member of the CNBC Advisor Council.
“Even in the past, when U.S. stocks have fallen, the dollar’s gains helped to offset a portion of the losses. In the past two weeks, that has not been the case,” he said.
Glassman said he maintains a two-thirds to one-third ratio of U.S. stocks to foreign stock funds in the portfolios he manages.
“We are not making any moves now,” he said. “The moves for us were made over time to maintain what we consider the appropriate foreign allocation.”
Annabelle Gordon/Bloomberg via Getty Images
The massive package of tax cuts House Republicans passed in May is expected to increase the U.S. debt by trillions of dollars — a sum that threatens to torpedo the legislation as the Senate starts to consider it this week.
The Committee for a Responsible Federal Budget estimates the bill, as written, would add about $3.1 trillion to the national debt over a decade with interest, to a total $53 trillion. The Penn Wharton Budget Model estimates a higher tally: $3.8 trillion, including interest and economic effects.
Rep. Thomas Massie of Kentucky was one of two Republicans to vote against the House measure, calling it a “debt bomb ticking” and noting that it “dramatically increases deficits in the near term.”
“Congress can do funny math — fantasy math — if it wants,” Massie said on the House floor on May 22. “But bond investors don’t.”
A handful of Republican Senators have also voiced concern about the bill’s potential addition to the U.S. debt load and other aspects of the legislation.
“The math doesn’t really add up,” Sen. Rand Paul, R-Kentucky, said Sunday on CBS.
The legislation comes as interest payments on U.S. debt have surpassed national spending on defense and represent the second-largest outlay behind Social Security. Federal debt as a percentage of gross domestic product, a measure of U.S. economic output, is already at an all-time high.
The notion of rising national debt may seem unimportant for the average person, but it can have a significant impact on household finances, economists said.
“I don’t think most consumers think about it at all,” said Tim Quinlan, senior economist at Wells Fargo Economics. “They think, ‘It doesn’t really impact me.’ But I think the truth is, it absolutely does.”
Consumer loans would be ‘a lot more’ expensive
A much higher U.S. debt burden would likely cause consumers to “pay a lot more” to finance homes, cars and other common purchases, said Mark Zandi, chief economist at Moody’s.
“That’s the key link back to us as consumers, businesspeople and investors: The prospect that all this borrowing, the rising debt load, mean higher interest rates,” he said.
The House legislation cuts taxes for households by about $4 trillion, most of which accrue for the wealthy. The bill offsets some of those tax cuts by slashing spending for safety-net programs like Medicaid and food assistance for lower earners.
Some Republicans and White House officials argue President Trump’s tariff policies would offset a big chunk of the tax cuts.
But economists say tariffs are an unreliable revenue generator — because a future president can undo them, and courts may take them off the books.
How rising debt impacts Treasury yields
U.S. Speaker of the House Mike Johnson (R-Louisiana) speaks to the media after the House narrowly passed a bill forwarding President Donald Trump’s agenda at the U.S. Capitol on May 22, 2025.
Kevin Dietsch | Getty Images News | Getty Images
Ultimately, higher interest rates for consumers ties to perceptions of U.S. debt loads and their effect on U.S. Treasury bonds.
Common forms of consumer borrowing like mortgages and auto loans are priced based on yields for U.S. Treasury bonds, particularly the 10-year Treasury.
Yields (i.e., interest rates) for long-term Treasury bonds are largely dictated by market forces. They rise and fall based on supply and demand from investors.
The U.S. relies on Treasury bonds to fund its operations. The government must borrow, since it doesn’t take in enough annual tax revenue to pay its bills, what’s known as an annual “budget deficit.” It pays back Treasury investors with interest.
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If the Republican bill — called the “One Big Beautiful Bill Act” — were to raise the U.S. debt and deficit by trillions of dollars, it would likely spook investors and Treasury demand may fall, economists said.
Investors would likely demand a higher interest rate to compensate for the additional risk that the U.S. government may not pay its debt obligations in a timely way down the road, economists said.
Interest rates priced to the 10-year Treasury “also have to go up because of the higher risk being taken,” said Philip Chao, chief investment officer and certified financial planner at Experiential Wealth based in Cabin John, Maryland.
Moody’s cut the U.S.’ sovereign credit rating in May, citing the increasing burden of the federal budget deficit and signaling a bigger credit risk for investors. Bond yields spiked on the news.
How debt may impact consumer borrowing
Zandi cited a general rule of thumb to illustrate what a higher debt burden could mean for consumers: The 10-year Treasury yield rises about 0.02 percentage points for each 1-point increase in the debt-to-GDP ratio, he said.
For example, if the ratio were to rise from 100% (roughly where it is now) to 130%, the 10-year Treasury yield would increase about 0.6 percentage points, Zandi said. That would push the yield to more than 5% relative to current levels of around 4.5%, he said.
“It’s a big deal,” Zandi said.
A fixed 30-year mortgage would rise from almost 7% to roughly 7.6%, all else equal — likely putting homeownership further “out of reach,” especially for many potential first-time buyers, he said.
The debt-to-GDP ratio would swell from about 101% at the end of 2025 to an estimated 148% through 2034 under the as-written House legislation, said Kent Smetters, an economist and faculty director for the Penn Wharton Budget Model.
Bond investors get hit, too
It’s not just consumer borrowers: Certain investors would also stand to lose, experts said.
When Treasury yields rise, prices fall for current bondholders. Their current Treasury bonds become less valuable, weighing on investment portfolios.
“If the market interest rate has gone up, your bond has depreciated,” Chao said. “Your net worth has gone down.”
The market for long-term Treasury bonds has been more volatile amid investor jitters, leading some experts to recommend shorter-term bonds.
On the flip side, those buying new bonds may be happy because they can earn a higher rate, he said.
‘Pouring gasoline on the fire’
The cost of consumer financing has already roughly doubled in recent years, said Quinlan of Wells Fargo.
The average 10-year Treasury yield was about 2.1% from 2012 to 2022; it has been about 4.1% from 2023 to the present, he said.
Of course, the U.S. debt burden is just one of many things that influence Treasury investors and yields, Quinlan said. For example, Treasury investors sent yields sharply higher as they rushed for the exits after Trump announced a spate of country-specific tariffs in April, as they questioned the safe-haven status of U.S. assets.
“But it’s not going out on too much of a limb to suggest financial markets the last couple years have grown increasingly concerned about debt levels,” Quinlan said.
Absent action, the U.S. debt burden would still rise, economists said. The debt-to-GDP ratio would swell to 138% even if Republicans don’t pass any legislation, Smetters said.
But the House legislation would be “pouring gasoline on the fire,” said Chao.
“It’s adding to the problems we already have,” Chao said. “And this is why the bond market is not happy with it,” he added.
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