International equities still sit behind US equities in DALI, but have kept up near-term momentum heading into 2026.
International equities had a historic year of outperformance over domestic equities. The iShares MSCI ACWI ex US ETF (ACWX) has outpaced the S&P 500 Index (SPX) by 11.58% so far this year, at 28.99% versus 17.41%, respectively. This is the widest margin of outperformance for the broad international equity benchmark against the US benchmark in 32 years. Only two years have shown a larger excess return favoring foreign stocks, 1993 at 25.29% and 1988 at 13.47%. We were close in 2003, ending that year at an excess return of 11.12%, slightly behind this year’s difference.
The prior periods of outperformance for international equities saw mixed results moving forward. After significant outperformance in 1988, the international equity benchmark underperformed its US counterpart for the next four years. We saw back-to-back years of outperformance in 1993 and 1994, only to be followed by another four years of underperformance. The mid-2000s was the only prolonged stretch of positive excess returns for foreign stocks, as ACWX outpaced SPX in eight of the eleven years from 1999 through 2009.
So, how should we expect foreign stocks to perform next year given the outperformance in 2025? The correct answer here is that we should not expect anything. Expecting a certain move or direction sounds great until the next unforeseen event impacts the price action. The quote often attributed to John Maynard Keynes comes to mind here; “Markets can stay irrational longer than you can stay solvent.” Maybe we will see international equities snap back to reality and underperform US stocks for the next few years, similar to what we saw in the early 1990s and again in the late 1990s. Or, maybe we get multiple consecutive years of outperformance like we saw in the mid-2000s. Unfortunately, there is no way to know with certainty which result will take place. Making a guess, even if it is an educated guess, flies in the face of maintaining a repeatable process.
Instead of making our best guess, we rely on the objective process of relative strength to follow the leaders in price appreciation. The Dynamic Asset Level Investing (DALI) tool uses relative strength to indicate which asset classes have proven themselves to be better than the others. It is not right every time, but the rankings have shown to be correct over time.
The rankings are generated by comparing representatives from the six broad asset classes up against one another (domestic equities, international equities, commodities, cash, currencies and fixed income). Each of the asset classes have equal representation within our matrix comparison. We then aggregate the number of long-term wins (buy signals) each representative from each asset class attains, using the short-term wins (X columns) as a tiebreaker if needed. The asset class with the highest total count of wins from its representatives gets ranked at the top.
Our DALI rankings still show domestic equities leading the way, as the asset class has gained more RS buy signals than any other asset class in December. However, we continue to see more near-term RS from international equities. We applied the same tally-rank idea to the X column count instead of focusing on buy signals, which causes international equities to jump atop the rankings at 303 X columns compared to the 285 X columns from domestic equities. This shows how foreign stocks are well positioned to capitalize on any further outperformance in 2026.
It is important to keep in mind that this should not affect any asset allocation decisions yet, as the DALI rankings have not changed. All our research around the DALI tool has shown it is ideal to focus as much allocation as possible in whatever asset class is at the top of the rankings. However, using this near-term lens can help make sure we are prepared for potential updates down the road.
There are a few important relationships we are monitoring for those potential updates. The first is emerging markets (EEM) versus US mid-caps (IWR). Emerging markets showed strong performance throughout much of the back half of 2025. Meanwhile, mid-caps lagged other US equity areas throughout the year. The 3.25% RS chart of EEM against IWR sits one box away from giving a buy signal (favoring EEM) for the first time since 2017.
Another relationship worth watching is developed markets (EFA) versus the equal-weighted S&P 500 (RSP). International developed equities showed very consistent returns throughout the year. Equal-weight US stocks, on the other hand, lagged throughout the year until bouncing back in the last two months. This RS chart sits just two boxes away from moving to a buy signal for the first time since 2010.
While neither of these relationships will make or break the position of the DALI asset classes, they could be helpful to set an alert for an early indication of potential changes.
