In a notable shift, international equities outperformed U.S. equities in 2025, with EFA (Europe, Australasia, and the Far East) ETF generating a return of +31.6% compared to the S&P 500’s +17.7%. This marks a significant turnaround from the previous decade, during which the S&P 500 consistently outpaced EAFE, compounding at 15.2% versus 7.1% since 2013.
This year, key factors driving EFA’s performance included a weakening dollar contributing approximately 8%, a rally in Financials, and a surge in Industrials, alongside historically discounted valuations. Analysts will be closely watching the sustainability of this performance amid rising volatility from geopolitical tensions, particularly the escalating conflict in Iran.
Looking ahead, consensus forecasts suggest S&P 500 earnings growth of 13-14% in 2026, while EAFE is expected to grow by 10-11%. This narrowing of the earnings growth gap raises questions about whether EAFE’s recent outperformance is cyclical or structural as it enters 2026 on stronger footing.
