Why international stocks are starting to outpace the U.S.

The picture for earnings and equity performance last year looked good with the MSCI World delivering a gain of 21.6%.

Under the surface however, the story is more complicated.

In the U.S., the number of companies that actually contributed to earnings beats was disappointing. Just under three-quarters of companies in the S&P 500 surpassed forecasts. That’s the lowest share in three years and down from 82% last quarter.

Europe was even weaker with only 47% of companies in the MSCI Europe beating expectations, well below the 54% five-year average. What does this fractured market mean for investors?

Let’s dive into a review of Q4 2025 earnings to find out.

What happened this week?

🛢️ Middle East conflict triggers major global oil supply shock ( The Guardian )

• What happened: The International Energy Agency warned that the Iran war has created the largest oil supply disruption in history as shipping through the Strait of Hormuz is blocked. Governments responded by coordinating a release of 400 million barrels of emergency crude reserves, but oil prices still surged above $100 a barrel.

• How it impacts investors: Rising oil prices could increase inflation and add volatility across global markets. Energy producers may benefit, while fuel-heavy sectors such as airlines and transportation could face pressure.

• Next steps: We’ve previously compiled a list of Midstream Oil and Gas Pipeline Operators, which could be highly impacted by the events today.

🌐 Trump launches tariff probes targeting global trade practices ( WSJ )

• What happened: The Trump administration launched new investigations under Section 301 of the Trade Act of 1974 targeting industrial overcapacity and forced labor practices. The probes could lead to new tariffs on dozens of trading partners including China, India, Japan, and the European Union.

• How it impacts investors: Potential tariffs could escalate trade tensions and disrupt global supply chains. Trade-sensitive sectors such as manufacturing, autos, and technology may experience increased volatility.

• Next steps: Discover companies exposed to global trade shifts using sector and thematic investing ideas.

☁️ Oracle raises revenue outlook as AI demand drives cloud growth ( WSJ )

• What happened : Oracle raised its fiscal 2027 revenue outlook to $90 billion as demand for artificial intelligence and cloud computing accelerates. The company also reported fiscal third-quarter revenue of $17.19 billion, up 18% year over year, with cloud infrastructure sales jumping 81%.

• How it impacts investors : Strong demand for AI infrastructure highlights the growing importance of cloud providers that supply compute power for AI workloads. This trend could sustain growth across the broader enterprise software and cloud sectors.

• Next steps: Track Oracle’s fundamentals and AI-driven growth in its company report.

🧠 Adobe posts record revenue as AI growth accelerates ( Investing News Network )

• What happened: Adobe reported record Q1 FY2026 revenue of $6.40 billion, up 12% year over year, with subscription revenue rising 13%. The company also said its AI-first annual recurring revenue more than tripled year over year and generated record operating cash flow of $2.96 billion.

• How it impacts investors: Strong AI-driven growth reinforces Adobe’s position in creative and enterprise software markets. It also highlights how AI features are becoming a key revenue driver across the broader software sector.

• Next steps: Review Adobe’s fundamentals and AI-driven growth on Simply Wall St.

🤖 Atlassian cuts 10% of staff to fund AI push ( TechCrunch )

• What happened : Atlassian announced it will cut about 10% of its workforce, roughly 1,600 employees, as it reallocates resources toward artificial intelligence and enterprise sales. The company said the layoffs are part of efforts to adapt to rising expectations around growth, profitability, and speed in the software industry.

• How it impacts investors: The move highlights a broader trend of tech companies restructuring to prioritize AI investment and operational efficiency. It also suggests AI-driven productivity gains could reshape staffing across the software sector.

• Next steps: Use our Stock Screener to find software companies investing heavily in AI.

💰 Global Earnings: A bumpy ride that led to a great view

Overall, 2025 was great for returns but those gains tested investors’ resolve. There were many surprises to deal with.

For one, trade worries rattled investors as bold new tariff policies were implemented throughout the year. As a result, the quarter was one of the most volatile seen in the year. The US then backed off a bit and eased its stance on trade, but investors continued to rotate into international equities and emerging market assets in the fourth quarter.

Even after tariff worries subsided a bit, there were new concerns when the U.S. Federal Government shut down for 43 days in October and November. Despite this, markets continued to climb higher and by mid-November, Congress reached a deal to reopen the government.

A lot of the support for strong global equity performance came from central banks that were willing to be accommodative. Globally, many decided to lower their policy rate or hold steady.

In the U.S., the Federal Reserve restarted easing just before the start of Q4. Their three cuts for the year totaled 75 basis points. In the UK, the Bank of England dropped rates by 100 basis points, and the EU Central bank cut by 50 basis points.

🇺🇲 Looking into markets

For the year, and for the fourth quarter of 2025, indexes performed well across the board:

• U.S. Equities (MSCI USA) : +17.3%, with +2.3% in Q4

• Non-US Developed Markets (MSCI World ex-USA) : +31.9%, with +5.2% in Q4

• Emerging Markets (MSCI EM) : +33.6%, with +4.7% in Q4

• All Country (MSCI ACWI Growth) : +22.4%, with +3.2% in Q4

Globally, value stocks outperformed growth during the quarter by a small but noteworthy margin. The MSCI ACWI Value Index beat the MSCI ACWI Growth Index by 0.82%.

💉 Diving into sectors

Sector-wise, investors had a lot of good performing sectors to choose from with nine out of the eleven sectors in the MSCI ACWI Index gaining for the year.

The top performers were Health Care and Materials while the worst-performing sectors included Real Estate and Consumer Discretionary.

Some investors may feel that these gains are on loan given the scope of uncertainty today. Concerns over the sustainability of the AI-driven boom persist. Meanwhile worries over economic struggles in China, and now the conflict with Iran and the fallout in oil prices, make the months ahead look uncertain.

Despite these real threats, the U.S. equities market has a history of demonstrating resilience. U.S. equities have survived a lot of punches since 2020 including the pandemic shutdown, supply-chain problems, an inflation surge, the fastest Federal Reserve tightening cycle on record, and tariff turmoil. As Fundstrat’s Tom Lee put it, each of these should have been a “kill shot” for the bull market, yet none were. Instead, the S&P 500 has returned about a 15% annualized return since then.

Fortunately, gains outside the U.S. were broadly distributed with Latin America and Europe performing very well. The performance of ex-U.S. markets, which have outpaced the U.S. for two consecutive years, suggests that a lasting reversal might be occurring in which the U.S. takes a backseat to a globally-driven equities market.

🇺🇸 U.S. Earnings: Performance was concentrated

Once again, tech dominated the S&P 500 in Q4 2025. The sector delivered a 33% return, the highest of all 11 sectors.

Broadly, the EPS picture was less exciting. The number of companies reporting actual EPS above estimates was 73% which is below the five-year average of 76%. Despite this, the strong performers were able to help the index finish the quarter with a 14% growth in earnings, representing the fifth consecutive quarter of double-digit growth, albeit lower than the 17.8% growth in earnings in Q4 2024.

The employment picture was less than encouraging as U.S. unemployment reached 4.4% in the quarter which was a 4-year high.

This matters because it can have an impact on the market. After 2009 for example, unemployment slowly dropped for a decade from about 9% in 2010 down to 3.5% by the end of 2019, representing a 50-year low. Over that same period the S&P 500 roughly tripled from its 2009 lows.

🎯The Sector Story: Utilities, Financials and IT are on top

While the U.S. did lag the rest of the world, S&P 500 companies reported earnings growth of 13.6%. 43% of Industrials reported a positive (aggregate) difference between actual earnings and estimated earnings, more than any other sector.

Financials, healthcare, and materials had the fewest amount of earnings surprises.

Meanwhile, the utilities, financials, and IT sectors had the greatest proportion of companies with an increase in net profit margins between Q4 2024, and Q4 2025.

On the lower end, two defensive sectors, real estate and utilities, posted a negative return. Both are usually considered rate-sensitive sectors. Another common characteristic between these two is that they have high amounts of debt and rely on cash distributions as a significant portion of their total return. Therefore, reduced expectations of a rate cut hurt them.

Of course, the question on the minds of investors is likely: what sectors benefited regarding price action from strong earnings?

A review of price changes from the day before the earnings release to the day after, offers some clues.

• Industrial Products: +2.72%
• Energy: +2.61%
• Utilities: +2.86%

These three sectors benefitted the most, as measured by price action from strong earnings.

📈 Small and mid-sized companies make a move

Q4 was also good to the earnings of small and mid-size firms, after a stretch of relatively flat or declining growth. Many of these companies are beginning to look like larger stocks in the way their earnings are growing.

This trend might be due to small and mid-sized companies being less exposed to international markets which lessens the impact of currency shifts. Additionally, these companies tend to use floating-rate and short-term debt more often than larger companies. As a result, these businesses benefit more from the rate cuts we’ve seen.

💡Read more about why small caps might make a great contrarian play in 2026.

🇪🇺Europe Earnings: up 6.2% in Q4

Compared to the rest of the world, on a return basis, Europe (MSCI Europe) performed among the top three regions in Q4 2025:

• Canada: 7.7%
• United Kingdom: 7.0%
• Europe: 6.2%
• Emerging Markets: 4.7%
• Japan: 3.2%
• United States: 2.7%
• China: -7.4%

The MSCI EMU Index (European Economic and Monetary Union) performed even better, climbing about 8.4% in Q4 of last year, and generating an annual return of over 40% in U.S. dollar terms. The index, which captures large and mid cap companies across the 10 Developed Markets (DM) countries in the EMU, has 225 constituents covering approximately 85% of the free float-adjusted market capitalization of the EMU.

While the year ended well for stock price, the Q4 2025 earnings picture was different.

Of the 201 STOXX 600 companies that reported earnings through March 2nd, about 57% have exceeded market estimates. Part of this underwhelming performance is due to ongoing challenges dating back to US tariff announcements earlier in the year as well as the new blanket tariffs of 10%.

🧠 Here are some of the key takeaways for the region:

• The financial sector performed well due to falling interest rates, which improved both asset quality and lending activity

• Consistent dividends and cash flow of healthcare and utilities stocks gave risk-averse investors a place to allocate their money

• The European Central Bank (ECB) kept policy rates unchanged in December

• Values stocks led the pack in Europe as they did throughout the globe.

💰 Asia Earnings: South Korea won 2025

The MSCI AC Asia Index gained about 3.9% in USD terms and climbed 32% for the year.

South Korea was a major reason for this strong performance due to being the best performing stock market in the world. Consider that the iShares MSCI South Korea ETF (EWY), which tracks the performance of more than 80 South Korean stocks, generated a total return of 95% in 2025.

This outperformance comes largely from a strong tech component. Samsung Electronics and SK Hynix represent 27% and 18% of EWY’s weighting, adding up to almost 45% of the total fund.

Japan was another standout performer during the quarter. The TOPIX index rose roughly 8.8% in Q4, reflecting investor enthusiasm for ongoing corporate governance reforms, improving shareholder returns, and a gradual shift away from decades of deflation to a moderate inflation environment.

The market also benefited from strong foreign inflows as Japan brought in about $12.25 billion of global equity inflows during the quarter.

Elsewhere in Asia, capital flows were mixed. Here are the takeaways:

• Taiwan continued to attract investment, due to its dominant role in global semiconductor supply chains and a growing ecosystem of artificial intelligence technologies.

• India experienced notable capital outflows in 2025, including during Q4, partly due to elevated valuations and investor rotation toward other regional opportunities.

• Indonesia and Thailand saw modest inflows toward the end of the year.

• Vietnam and the Philippines faced smaller net outflows amid shifting global demand patterns.

💡 The Insight: The rotation trade is alive and well

In 2025, international stock markets outperformed the U.S. This trend appears to be continuing into 2026.

Indexes like the TSX, JP 225, GB100, HK50, and the EU50 are all outperforming the S&P 500. While this could change, the strong performance of international markets last year is starting to look like a pattern that can persist.

Last year and the first months of this year suggest that investors may want to revisit their allocation to international equities and capture any further upside that may be coming. Research from J.P. Morgan suggests that developed international stocks may generate better annual returns than U.S. equities over the next 10-15 years.

Their analysts expect that difference to be about 1.4% annually with EAFE stocks (Europe, Australasia, Far East) returning 8.1% compared to the US generating versus 6.7%.

For those looking for a reference when balancing U.S. and international it may be helpful to remember that the MSCI World Index, a common benchmark for global stocks, is still roughly 70% U.S. and 30% non-U.S.

While the U.S. has a strong, long-term history of outperforming international equities, that pattern might be changing. Though the S&P 500 delivered a 17.9% gain last year, the MSCI World ex USA well outperformed with a 32.7% return. So far, 2026 looks like it could be a continuation of international outperformance.

Key events next week

Monday

• 🇨🇦 Canada Inflation Rate YoY (Feb)
  • 📈 Forecast: 2.1%, Previous: 2.3%
  • ➡️ Why it matters: Inflation trending closer to the Bank of Canada’s target would strengthen expectations for rate cuts later in the year.

Tuesday

• 🇦🇺 RBA Interest Rate Decision
  • 📊 Forecast: 3.85%, Previous: 3.85%
  • ➡️ Why it matters: With the last rate decision leading to a hike, next week’s decision is something investors will be watching closely.

Wednesday

• 🇺🇸 US Producer Price Index (PPI) MoM (Feb)
  • 📈 Forecast: 0.3%, Previous: 0.5%
  • ➡️ Why it matters: PPI tracks inflation at the producer level and can signal where consumer prices may head next.

Thursday

• 🇺🇸 Fed Interest Rate Decision & Economic Projections
  • 📊 Forecast: 3.75%, Previous: 3.75%
  • ➡️ Why it matters: This is the biggest event of the week. Investors will focus on the Fed’s outlook for inflation, growth, and the path of interest rates, which can quickly move global equity and bond markets.

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Simply Wall St analyst Stella and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. Any comments below from SWS employees are their opinions only, should not be taken as financial advice and may not represent the views of Simply Wall St. Unless otherwise advised, SWS employees providing commentary do not own a position in any company mentioned in the article or in their comments.We provide analysis based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.