For many investors, especially U.S. investors, the United States seems like the only stock market that matters. The U.S. has been a global leader in technology, finance, and innovation for decades, and this dominance has translated into strong stock market returns. But relying solely on U.S. stocks, despite their stellar history, could be a poor long-term strategy — especially when examined through the lens of historical data, valuation, and benefits of geographic diversification.

Why Do Investors Favor U.S. Stocks?

Here are the common arguments in favor of a U.S.-only equity portfolio:

• Long-Term Outperformance: Over the last 15 years (2009–2024), the S&P 500 has returned ~13% annualized, while the MSCI EAFE Index (Europe, Australasia, Far East) has returned ~6% annualized.
• Dominant Tech Giants: U.S.-based companies like Alphabet, Apple, Meta, Microsoft and Nvidia lead in global market capitalization and innovation.
• Elite Institutions: The U.S. is home to 15 of the world’s top 20 universities according to QS World Rankings.
• Stable Rule of Law: The U.S. offers transparent legal systems and protections for investors.
• Historical Support for Immigration: A 2018 study by the National Foundation for American Policy found that 55% of U.S. billion-dollar startups were founded by immigrants. In Silicon Valley, over 50% of tech founders are foreign-born.
• A Culture of Innovation: From the internet to electric vehicles, many of the past century’s breakthrough technologies originated in the U.S.

While these points are valid, they are not guarantees of future investment outperformance. Here’s why investors should still seek global equity diversification.

The Case for International Diversification

1. Past U.S. Outperformance ≠ Future U.S. Outperformance

It’s true that the U.S. has outperformed over the last 15 years — but much of this has come not from faster earnings growth, but from rising valuation multiples. As Cliff Asness of AQR Capital highlighted in a 2021 paper, the cyclically adjusted price-to-earnings ratio (CAPE) of U.S. stocks has increased dramatically since the 2008 financial crisis. The U.S. outperformance was driven by P/E expansion, not superior earnings growth.

“When CAPE ratios are high, future returns are typically lower. The market is essentially pricing in exceptionalism.”
— Cliff Asness, International Diversification Works (Eventually)

This means U.S. investors today may be paying more for the same dollar of earnings, and current valuations imply lower expected returns going forward.

2. History Shows Cycles of Underperformance

The U.S. has not always been the top-performing market. In fact, there are long stretches of time where international equities have outperformed:

• 1970s: U.S. stocks lagged behind international equities significantly due to inflation, weak GDP growth, and oil shocks.
• 2000–2009: Often called the “lost decade” for the U.S., the S&P 500 returned -0.9% annually, while emerging markets (MSCI EM) returned over 9% annually.

History is also replete with similarly dominant countries, that eventually fell from that position. More recently, in the 1980s, Japan was the darling of global investors. At its peak in 1989, Japan accounted for 45% of global market capitalization. Then it all collapsed.

The Nikkei 225 index dropped over 80% from its 1989 peak and did not recover its prior highs for more than 30 years. Japan is a cautionary tale that current market dominance does not immunize a country from prolonged future underperformance.

3. Diversification Still Works

Modern portfolio theory shows that diversification helps lower portfolio volatility without sacrificing returns. While global equity correlations have increased, they are far from perfect.

For example:

• After the dot-com crash (2000–2002), the S&P 500 lost nearly 40%, while international stocks performed comparatively better.
• In 2022, U.S. tech stocks fell sharply amid rising rates, while some European and emerging markets proved more resilient.

Academic studies — such as those by Meir Statman and Kenneth French — suggest that a globally diversified portfolio improves the risk-return tradeoff, especially during market shocks.

4. You’re Already Overexposed to the U.S.

If you are a U.S. investor, outside of your stock portfolio, much, if not all, of your personal financial profile is already tied to U.S. fortunes:

• Human capital: Your job and wages are tied to the U.S. economy.
• Real estate: Most Americans’ largest asset is their home — priced in USD, tied to U.S. market conditions.
• Business interests: If you own a business, its success is likely correlated with U.S. economic cycles.
• Government support: Social Security and Medicare are dollar-based U.S. entitlements.

All of this creates concentration risk. By adding international equity exposure, you gain exposure to other economies, political systems, currencies, and central banks.

5. Country-Specific Risks Are Real

Japan is the best modern example, but others exist:

• Russia (1917 Bolshevik Revolution that closed the stock market and nationalized private assets),
• China (1949 Communist Revolution that closed the stock market and eliminated private ownership of assets),
• Germany (1930s Nazi Regime kept the stock market formally open but capital controls, war destruction and selective confiscation made investments essentially worthless),
• United Kingdom (post-empire stagnation),
• Argentina (once one of the richest countries in the world, now battling recurring crises).

No country — not even the U.S. — is immune to structural stagnation, overvaluation, or geopolitical risks.

6. What Does the Research Say?

Academic consensus supports international diversification. Studies from Vanguard, AQR, and global pension funds conclude that:

• Optimal equity allocations should include at least 30–40% in non-domestic equities.
• The “home bias” — investors allocating ~80% or more of equities to their own country — leads to suboptimal performance, with more exposure to country-specific downturns and no opportunity to benefit from positive developments abroad.
• Over 120+ years, global equity markets have rotated leadership multiple times. A single-country strategy increases tail risk.

Conclusion: Geographic Diversification Should Be Seriously Considered

The United States remains an incredible engine of innovation, productivity, and resilience. But history, valuation, and logic all suggest that betting solely on U.S. equities may not be the most prudent strategy.

Geographic diversification is not a bet against the U.S. — it’s a risk management tool. Just as you wouldn’t put your entire retirement in a single stock, there’s no reason to concentrate solely on one country’s markets, no matter how exceptional its past performance.