Is US equity dominance finally giving way to international markets?

With international and emerging markets delivering strong outperformance for Australian investors in 2025 and emerging markets continuing to lead year-to-date, the era of US equity dominance may be giving way to something broader.

ClearBridge Investments is making a confident call in its latest mid-year outlook: non-US equities are not just rebounding, they may be entering a sustained leadership cycle.

For financial advisers managing client portfolios still heavily weighted to the US market, this is the kind of structural shift that rewards early movers and punishes those who wait for confirmation.

Earnings momentum is doing the heavy lifting

The valuation case is well known. What ClearBridge adds to it is an earnings story that is only getting stronger.

“Improving earnings expectations, attractive relative valuations and a broader set of macro catalysts suggest non-U.S. equities may be entering a more durable period of leadership,” says Jeff Schulze, head of market and economic strategy at ClearBridge Investments.

Schulze points to the MSCI Emerging Markets Index as a standout. Earnings revisions have moved materially higher, outpacing improvements seen in the US, Europe and Japan.

“That matters because earnings momentum is often a key driver of sustained market outperformance,” he says.

A key driver behind that earnings upgrade cycle: artificial intelligence.

Emerging markets, particularly those supplying the infrastructure, components and power for the global AI buildout, are positioned to benefit.

“In our view, emerging markets remain well positioned to benefit from continued demand tied to the AI buildout, and particularly the companies and countries providing the infrastructure, components and power needed to support that expansion,” says Schulze.

The valuation case is still compelling

Even after recent gains, the price gap between US and international markets remains at historically wide levels. ClearBridge sees this as a meaningful source of upside if fundamentals keep improving.

“Even after recent gains, the discount between U.S. and non-U.S. markets remains historically wide, leaving room for further upside if fundamentals continue to improve.

A softer U.S. dollar would add another tailwind, as dollar weakness has historically supported non-U.S. equity returns by easing financial conditions and improving capital flows into overseas markets.”

There is also a policy dimension. There is also a policy dimension. A more accommodative US Federal Reserve and lower long-term rates could further strengthen the case for international exposure. A durable resolution in the Middle East would add further support.

“If monetary policy in the U.S. becomes more accommodative and long-term rates move lower due to a durable resolution in the Middle East, that combination could provide additional support for international equities broadly,” Schulze adds.

A structural story, not just a cyclical trade

ClearBridge is careful to frame this as more than a short-term rotation. The structural forces underpinning international outperformance are building.

International markets carry higher weights to cyclical sectors such as financials, industrials, energy and materials. These are sectors that could benefit from firmer inflation, higher nominal growth or increased fiscal support outside the US.

“International markets generally offer greater exposure to cyclical sectors such as financials, industrials, energy and materials, which may benefit in an environment of firmer inflation, higher nominal growth or rising fiscal support outside the U.S.,” says Schulze.

Beyond sector composition, ClearBridge outlines three additional structural tailwinds. First, a commodity upcycle driven by data centre construction and renewable energy investment. Second, a recovery in Chinese consumer demand with global supply chain ripple effects. Third, the broadening of AI productivity gains beyond the narrow group of US mega-cap winners.

“The continued democratisation of AI could improve productivity and reduce costs for companies outside the U.S., broadening the benefits of technological innovation beyond a narrow group of mega cap winners,” Schulze says.

What to do before this becomes consensus?

For advisers reviewing client asset allocation, the ClearBridge mid-year outlook lands at an important moment.

The case for international equities is no longer a contrarian bet or a valuation argument waiting for a catalyst. Earnings momentum is already moving. Structural tailwinds are already building. The macro conditions are already shifting.

“The opportunity in international equities is no longer just about valuation support or mean reversion. It is increasingly supported by improving earnings, favorable macro conditions and multiple pathways to broader market leadership,” says Schulze.

The more pressing question for advisers is not whether international markets are attractive. The data suggests they are.

The question is whether client portfolios, many of which were built around a decade of US dominance, are positioned to participate in what comes next.

Portfolios that are not positioned to participate will not just miss the upside. They will carry the concentration risk of a market that may no longer be leading.

The rotation does not wait for consensus. The advisers who act on structural shifts before they become headlines tend to serve their clients better than those who wait for permission from the crowd.