For 11 of the 12 years following the 2008 financial crisis, U.S. stocks beat international markets. But that trend has flipped: Over the past four years, international equities have taken the lead.

Key Takeaways:

• International stocks have outperformed the U.S. for four straight years, reversing the relative trend of the 12 post-crisis years.
• U.S. financials trade at 15–16 times earnings, versus 11–12 times for European financials, despite improved earnings.
• International stocks trade at a discount in every sector, with dividend yields 200 basis points above U.S. stocks.

Thornburg Investment Management says the shift looks less like a fluke. It looks more like a return to how markets normally behave.

Josh Rubin, client portfolio manager at Thornburg, laid out the case during an August 20 webcast. Kirsten Chang, VettaFi’s senior industry analyst, hosted the event, titled “The Rise of International Equities.”

In a live poll during the event, 64% of attendees said the U.S. economy is too dependent on AI spending. Another 22% disagreed, and 14% were unsure.

Rubin agreed with the majority, calling it “a concern that we also have at Thornburg.” He pointed to signs that the U.S. AI economy has grown outsized relative to sustainable growth. The reason, he said, goes back three decades.

See more: Case for International Equities Strengthens as AI Spending Drives U.S. Market

The U.S. share of global GDP has held near 25% for three decades, Rubin said. Its share of global corporate earnings has held near 40% over that same span. Yet the U.S. share of global stock market value climbed from 30% to about two-thirds.

Rubin pointed to the Magnificent Seven as the main driver of that gap. The group of mega-cap technology stocks is now worth more than $20 trillion. Remove those seven companies from the U.S. market. What’s left is about the same size as international stock markets combined.

How Rate Normalization Is Fueling International Markets

Zero and negative interest rates hit international markets harder than the U.S. for over a decade, Rubin said. At one point, $18 trillion of global debt carried a negative yield. The European Central Bank held rates near zero through 2022, years after the Federal Reserve began raising them.

International stock indexes carry about 25% exposure to financials, according to Rubin. The U.S. index carries about 30% exposure to technology. U.S. financials earnings grew as the Fed raised rates. European financials earnings stalled at zero, then took off once the ECB followed suit.

U.S. financials now trade around 15–16 times earnings, Rubin said. That’s up from about 14 times when rates were low. European financials trade around 11–12 times earnings, little changed from when their business was worse. The improvement hasn’t been priced in yet.

See more: Don’t Overlook the Opportunity for International Value ETFs

Owning U.S. multinationals isn’t the same as owning international exposure, according to Rubin. U.S. companies draw about 60% of revenue domestically. Foreign stocks draw only 15% to 20% of revenue from the U.S. That leaves far more exposure to the rest of the world.

Every sector of the international market trades at a lower valuation than its U.S. counterpart, Rubin said. International stocks also carry a dividend yield about 200 basis points higher than U.S. stocks. That gap has historically been enough to sway how advisors judge a manager’s performance.

Turning the International Discount Into a Portfolio

Thornburg has built two ETFs around that gap. The firm manages about $60 billion in assets. More than $25 billion of its equity holdings sit outside the U.S., Rubin said.

The Thornburg International Equity ETF (TXUE) traces back to a mutual fund the firm launched in 1997. The ETF itself began trading last year, benchmarked against developed international markets. Rubin said the strategy has outperformed that benchmark in most up and down markets over the long term.

Income-focused investors can turn to the Thornburg Premium Income Builder ETF (THOR), Rubin said. The fund traces back to the firm’s Investment Income Builder mutual fund, launched in 2002.

That fund has historically paid a dividend yield above 4%, with annualized returns topping 10% over 10- and 20-year periods. Roughly half of that return has come from income, the rest from price gains. The fund also tends to move less than the broader global market. About two-thirds of its holdings sit outside the U.S., according to Rubin.

Rubin closed with a broader point about currency, which cuts both ways for international investors. He pointed to Nestle as an example. The Swiss franc strengthened against the dollar last year. But Nestle’s global reach meant it hedged away much of that benefit rather than passing it through to shareholders.

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