Times When International Markets Outperformed the S&P 500

Daniel Lee

5 days ago

10 min read

The S&P 500 is often treated as the holy grail of investing. The popular narrative runs like this: it is all a retail investor needs, because over the long run the market always goes up, and no other market or instrument is likely to beat it.

That belief rests on two things. The first is recency bias, the habit of assuming whatever has worked lately will keep working. The second is groupthink, where any counter narrative gets attacked rather than weighed on its merits.

In this article, I lay out the specific periods since 1970 when international markets outperformed the S&P 500.

The point is not to bash the S&P 500. It is a strong index, and it belongs in most portfolios. The point is to debunk a myth: that the S&P 500 alone is enough, and that diversification is meaningless against long-term returns.

The core message is simple. Do not mistake the engine for the car. The S&P 500 can be a powerful engine, but an engine alone won't get you where you are going.

The evidence comes in two parts.

Part 1 looks at regional indices, the broad international baskets you can buy in a single fund. It shows you the upside of looking beyond the US alone.

Part 2 zooms in on one country, Japan, not as a recommendation but as the clearest warning in modern history of what happens when a single market runs too far. It shows you the cost of the opposite mistake: concentration.

How to read the numbers

Every return below is in US dollar terms with dividends reinvested, annualized. Figures are approximate and move meaningfully depending on the exact start and end dates chosen, so each window states its span. Where a market fell, the figure carries a minus sign. “Gap” is how many percentage points per year the regional index beat the S&P 500 by.

For readers who just want a quick takeaway, you can skip to the summary section, though I highly recommend that you read through the entire article fam. ಠ_ಠ

The Whole Picture on One Page

Here is every major regional outperformance window since 1970.

Read down the last column. These are not small margins.

Period	Winning regional index	Its annual return	S&P500 Annual return	Gap / yr
1970 to 1979	MSCI EAFE	+10.1%	+5.9%	+4.2 pts
1985 to 1989	MSCI EAFE	+36.5%	+20.4%	+16.1 pts
1988 to 1993	MSCI Emerging Mkts	+36.5%	+14.9%	+21.6 pts
2002 to 2007	MSCI Emerging Mkts	+29.0%	+6.1%	+22.9 pts
2002 to 2007	MSCI EAFE	+14.8%	+6.1%	+8.7 pts
2017 (1 year)	MSCI Emerging Mkts	+37.8%	+21.8%	+16.0 pts
2022 (1 year)	MSCI EAFE	−14.0%	−18.1%	+4.1 pts
2025 (1 year)	MSCI Europe	+36.3%	+17.9%	+18.4 pts

The 2002 to 2007 row is the bull market within the 2000 to 2009 decade, shown separately to separate the years international surged from the full decade, when the S&P went nowhere.

MSCI EAFE is developed markets outside the US and Canada (Europe, Australasia, the Far East).

MSCI Emerging Markets covers developing economies.

MSCI Europe is the European slice.

All three are things a retail investor can hold in one low-cost fund today.

Part 1: Regional Markets That Outperformed the S&P 500

1. The 1970s: international wins the stagflation decade (1970 to 1979)

Over the full decade, MSCI EAFE compounded at roughly +10.1% a year while the S&P 500 managed about +5.9% a year. Worse for US investors, that 5.9% was actually a loss once you account for the decade’s high inflation.

What held the S&P back:

Stagflation, plus two oil shocks in 1973 and 1979.
The collapse of the “Nifty Fifty,” the expensive large cap darlings of the day. The S&P fell 14.7% in 1973 and 26.5% in 1974.

What lifted international:

The Bretton Woods currency system broke down. After the US left the gold standard in 1971, the dollar was devalued and allowed to float, and foreign currencies rose sharply against it. For a dollar-based investor, that currency move alone added to foreign returns.

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2. The 1980s blowout: EAFE’s single biggest margin (1985 to 1989)

This is the most dramatic developed markets win in the whole record.MSCI EAFE compounded at about +36.5% a year over these five years against the S&P 500’s +20.4% a year. Note that the S&P did very well here. It roughly doubled. International simply did far better.

The two drivers:

The 1985 Plaza Accord, a coordinated effort by major governments to push down an overvalued dollar. The dollar fell more than 40% over the next two years. Because EAFE returns are unhedged, that currency drop magnified foreign gains for US investors.
Japan’s asset bubble, fuelled by cheap money. EAFE was heavily weighted to Japan at the time, so this was largely a Japan story wearing a regional label.

A caution hidden in this one

The engine behind this regional win was overwhelmingly a single country. EAFE was heavily weighted to Japan at the time, so this five-year surge was really a Japan story wearing a regional label. That is exactly why Japan gets its own section. The same concentration that powered this run is what made its aftermath so painful. Part 2 tells that half of the story.

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3. Emerging markets arrive (1988 to 1993)

The MSCI Emerging Markets index began in 1988, and its first years were explosive: roughly +36.5% a year against the S&P 500’s +14.9% a year, a gap north of 21 points annually.

This was the first big wave of capital flowing into liberalising economies across Latin America and Asia, and it produced enormous single years.

Fair warning: the index was young, the base was small, and the ride was extremely volatile. Include it for completeness, but weight it accordingly.

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4. The Lost Decade (2000 to 2009)

This is the one most investors have genuinely forgotten. Over the full decade, one dollar in the S&P 500 came out the other side worth less than it went in. Emerging markets, over the same ten years, compounded at nearly 10% a year.

Index	Annualised return, 2000 to 2009	Gap vs S&P 500
MSCI Emerging Markets	+9.8%	+10.8% / yr
MSCI World ex-US (EAFE)	+1.6%	+2.6% / yr
S&P 500	−0.95%	—

What drove the split:

The S&P entered the decade expensive after the dot com bubble, which burst in 2000. It then took a second blow in the 2008 financial crisis.
Emerging markets started the decade cheap. China joined the World Trade Organization in 2001 and poured money into infrastructure, setting off a commodity boom that lifted resource rich economies. The dollar also fell around 30% against the euro over 2003 to 2007.
The sharpest part of the run was 2002 to 2007, when emerging markets compounded at about +29% a year and EAFE at +14.8%, against the S&P’s +6.1%. That is the bull market inside the decade.

Watch the start date

Measure this era as 2001 to 2010 instead of 2000 to 2009 and the emerging markets figure jumps to roughly +15.9% a year. Same episode, different endpoints. Shifting the window past the worst dot-com years flatters the number. Whenever someone quotes a return, ask what dates they used.

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5 and 6. The recent reversals: 2017, 2022, and 2025

International leadership did not end in the 2000s. It has flickered back to life three times recently.

Year	MSCI EAFE	MSCI EM	S&P 500
2017	+25.6%	+37.8%	+21.8%
2022	−14.0%	−19.7%	−18.1%
2025	+31.9%	+34.4%	+17.9%

2017: a rare year of synchronized global growth. Emerging markets and international developed both beat the S&P, helped again by a falling dollar.

2022: a US bear market. International developed (EAFE) fell less than the S&P and so “won” on a relative basis, but emerging markets fell more. The lesson: “international” is not one single thing. Developed and emerging can move apart, which is itself an argument for holding both.

2025: the live example. International decisively beat the US. EAFE returned around +32%, emerging markets around +34%, and European stocks around +36%, against the S&P 500’s roughly +18%.

The drivers rhyme with history: the dollar had its worst first half since 1973, US market concentration hit a record (the ten largest S&P names reached about 41% of the index), and international valuations sat far below an unusually expensive US market.

Read 2025 carefully

One strong year is not a new era. It is one year, with early 2026 so far continuing the trend. Treat it as a live example of the same setup that produced past rotations, not as proof the next decade is settled. Reported 2025 figures also vary a little by source and by whether price or total return is used.

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The Pendulum Also Swings the Other Way (2010 to 2019)

To be fair and complete, here is the decade that built today’s myth. This is the S&P winning, and winning big. Leaving it out would be the same selective storytelling this article argues against.

Index	Annualized return, 2010 to 2019
S&P 500	+13.6%
MSCI World ex-US	+5.3%
MSCI Emerging Markets	+3.7%

Notice the symmetry. In the 2000s, emerging markets beat the S&P by about 10 points a year. In the 2010s, the S&P beat emerging markets by about 10 points a year.

Leadership did not disappear. It rotated. An investor who looked only at the 2010s would conclude the US always wins. An investor who looked only at the 2000s would conclude the opposite. Both are looking at half the cycle. The 2025 reversal is simply the pendulum starting to swing again.

Part 2: The Japan Case Of Concentration Risk

Regional baskets spread risk across many countries. A single country does not.

Japan is the clearest example in modern financial history of one market beating the S&P 500 for two decades, and then handing the entire lead back over the two decades that followed.

This is the other half of the 1980s story from Part 1.

The run: 1970 to 1989

Index / window	Annualized return	Note
MSCI EAFE, 1970 to 1989	+15.21%	Japan was the main driver
Nikkei 225, 1985 to 1989	~ +26% (price)	Index roughly tripled in five years
Nikkei 225, 1988	~ +40% (price)	Blow off phase
Nikkei 225, 1989	~ +29% (price)	Final leg before the peak

For twenty years, international developed markets, led by Japan, compounded faster than US large caps. At the December 1989 peak, Japan, a country with under 1% of the world’s population, made up roughly 42% of global stock market value, more than the United States at the time.

By then, Japanese stocks traded at a price-to-earnings ratio near 60 times, with a dividend yield around 0.4%. Valuations had detached from reality.

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The collapse: 1990 to 2009

This is why Japan earns its own section. The investor who bought at the 1989 peak did not have a bad year. They had a bad two decades.

Index / window	Annualized return
MSCI EAFE, 1970 to 2009 (full 40 yrs)	+9.49%
S&P 500, 1970 to 2009 (full 40 yrs)	+9.87%

Look at the full forty years. EAFE won heavily in the first twenty (+15.21% a year), then lost the entire lead over the next twenty as Japan’s bubble collapsed. By 2009 the two indices were effectively tied. Two decades of dominance, erased by two decades of stagnation.

The lesson

This is not “avoid Japan.” It is this: sustained outperformance is often followed by an equally sustained reversal, and concentration in one market can hand you a loss you may not recover from in your investing lifetime. The same point cuts at a US only portfolio today. Being concentrated in the winner feels safe right up until it is not.

Summary & Key Lessons

The Two Forces Behind Every Window

Strip away the specifics and the same two forces show up again and again.

1. A weakening US dollar

When you own an international fund, you own foreign stocks priced in foreign currencies. If the dollar falls, those foreign returns are worth more once converted back.

A weakening dollar sits underneath the 1970s (Bretton Woods breaking), the 1985 to 1989 run (the Plaza Accord), the 2002 to 2007 boom, and both 2017 and 2025.

In some of these years, the currency move supplied close to half of the total international return.

The honest flip side: part of what you earn abroad is a currency bet, not just a bet on better companies. Worth knowing what you actually own.

2. An expensive US starting point

The price you pay decides your future return.

Rich US valuations preceded weak US performance before the 1973 to 1974 crash, before the 2000 to 2002 dot com bust, and they describe the US market today.

As of late 2026 the US sat near the most expensive levels in its recorded history on a cyclically adjusted basis, while European and emerging market valuations were markedly cheaper. Cheap markets have more room to rise. Expensive ones have more room to disappoint.

There is a third, quieter force worth naming: sector concentration. The S&P 500 today is dominated by a handful of large technology names. International indices are not. So some of what looks like a US versus world contest is really a technology versus everything else contest wearing a geographic label.

Owning both spreads more than just geography.

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What This Means For You

Leadership rotates, and the cycles are long. US and international have each led for many multi year stretches since 1970. Neither wins forever.
Diversifying regions also diversifies your currency and your sectors. You are spreading three risks at once, not just one.
“International” is not monolithic. Developed and emerging markets can diverge sharply, as 2022 showed. Holding both is more robust than picking one.
Concentration is the real danger, not the choice of index. Japan in 1989 and a US only portfolio today share the same flaw: everything riding on one market staying on top.
Do not confuse one good year with a new regime, or dismiss it as noise. 2025 is a live example of a familiar setup, not a settled forecast.

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What Would Change This Picture

If you want to track whether international’s turn has real staying power, watch three things:

A sustained dollar rally. A strengthening dollar would remove the biggest tailwind behind international outperformance.
US earnings broadening beyond the largest technology names. If growth widens across the US market, the S&P’s case strengthens again.
The valuation gap closing. If US and international valuations converge, the setup that favours international weakens.

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The Bottom Line

Count the windows. The 1970s, the 1980s, the early 1990s, the 2000s, and now the 2020s. Since 1970 the S&P 500 has repeatedly gone through multi-year stretches of lagging international markets, sometimes by four points a year, sometimes by more than twenty.

Investors who owned only the S&P through those windows sat and watched other markets compound while theirs went sideways. Japan is the reminder of how long “sideways” can last.

None of this says sell your US stocks. It says do not mistake the last fifteen years for a permanent law of nature. The S&P 500 is a fine engine. It is not the whole car. Diversification is not a bet against the S&P. It is insurance against your own certainty that it will always be the one to own.

If you'd like to see how these would work with real numbers on your own situation, your target investment strategy and retirement planning — let's have a conversation.