International equities gained market RS for the first time in 20 years and are on the cusp of claiming DALI's top spot. On the other hand, the group is in heavily overbought territory. Given the conflicting stances, how should investors proceed?
International equities delivered an impressive 2025, supported by strength in both emerging and developed markets, but their performance this year might be even more impressive. Broad international equity benchmark ACWX has gained 6.8%, marking its fifth‑best start to a year since 1988. Meanwhile, the iShares MSCI Emerging Markets ETF (EEM) has gain more than 11% YTD, which is its strongest January return since 2006. With the asset class already burning bright, should we be more optimistic about its outlook for the remainder of the year, or has the group become too hot to handle?
There have been six other years in which ACWX gained 5% or more through January, and only two of those instances saw the fund move lower from February to December. That said, stronger starts to the year have typically been followed by lower average returns across the remainder of the year, especially within emerging markets. When ACWX gains 5% in January, it averages 1.9% across the rest of the year compared to 6.5% when ACWX gains less than 5% in January. Emerging markets show an even larger discrepancy, with EEM losing 2.3% over the rest of the year compared to a 12% return when ACWX rises less than 5% in January. While developed markets were less impacted, the iShares MSCI EAFE ETF (EFA) still underperformed the rest of the year after a hot start. As a result, the strong January performance could mean that the asset class is due for some cooling off.
One counterargument is that the strength of international equities has not been limited to the past month. International equities have been a point of leadership over the last year, causing significant developments in relative strength. ACWX recently moved to a market RS buy signal against the S&P 500 Equal Weight (SPXEWI) for the first time in nearly 20 years. While 2006 to 2008 was previously the only period in which international equities were favored, following this relationship has still outperformed both individual markets, suggesting continued strength for ACWX.
Furthermore, international equities are now within striking distance of first place in DALI. The asset class gained ten signals in January while domestic equities lost three, placing them within three signals of each other. Apart from a brief three‑day stretch last April, international equities have remained outside of DALI’s top spot since 2023. With historical trends and DALI providing conflicting views on international equities, how should we view the group?
Thankfully, the Asset Class Group Scores page offers some additional context. Among the top 20 groups by score, 13 are international, with Latin America leading the way as the iShares S&P Latin America 40 ETF (ILF) is up more than 20%. Broadly speaking, most international groups display extremely high levels of strength. However, most of them are also extremely overbought, showing OBOS readings well above 100%. In fact, EEM’s current OBOS reading of 146% is its highest since 2004. While the long-term outlook of those groups remains solid, they could be poised for near-term pullbacks as they consolidate back to normal levels.
For the time being, both domestic and international equities remain the two strongest asset classes in the market, deserving allocation within most portfolios. International equities could soon overtake the US, but investors should wait for some degree of normalization before adding to most international positions given the group’s extended and overbought state.
