Is it time to reconsider international stocks?
On screen disclaimer:
Please read important information at the end of this program. Recorded on 3/24/2025
On-screen Disclaimer
Please read important information at the end of this program. Recorded on 03/24/2025.
LOWER THIRD
Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank
Chris Hyzy
With U.S. GDP growth currently lagging, Europe and China have significantly outperformed volatile U.S. equity markets in the first quarter of 2025. What a change from the past 15 years from 2009 through 2024, the S&P 500 index of large U.S. companies outperformed Europe and China, handily. In fact, investors may have come to see international stocks almost as an afterthought during that time frame.
What's behind this sudden reversal? Is this a temporary situation or something deeper going on?
Joining me for insights into these and other questions is Joe Quinlan, head of Market Strategy for the Chief Investment Office. Joe, thanks for being here.
Chris Hyzy
Let's talk about the recent world that it's transforming. We use that phrase a lot over the years, probably decades. But as we come into 2025, a lot has changed. From your perch, what are the big changes that have been occurring and are likely to occur through 2025 around the world?
Lower Third
Joe Quinlan
Head of Market Strategy
Chief Investment Office
Merrill and Bank of America Private Bank
Joe Quinlan
Well, you're right, Chris. It's amazing how the script has been flipped from the year ahead, and in particular, Europe and China. Let's start with Europe first. A lot of opportunity, a lot of optimism. I was just over there, they're, brimming with excitement about more defense, taking their fate into their own hands.
Chris Hyzy
And it caught markets by surprise?
Joe Quinlan
For sure. Right. Because remember, Europe was going to lie dormant, the U.S. was going to continue to roll forward. It's flip. So Europe, the growth outlook is improving. Earnings momentum is improving. And then if you go to China, DeepSeek, early on, really showed their technological capabilities.
Chris Hyzy
So you have growth picking up. You have interest rate differentials somewhat narrowing. But you also have on the monetary front, particularly in Europe, you have them relaxing policy there. So, lowering of short-term rates, where in the U.S we're staying pat. But what's happening with the dollar?
Joe Quinlan
The dollar's losing a little bit of a bid here. And it was overdue, right? I mean we talked about this in 24, dollar's a little overbought, so to speak, Now it's losing some of that. Which is actually good for U.S. multinationals because when they convert their earnings from Europe back to U.S. dollars, that's good for them. So, I'm not worried about that.
There's no recession, we believe, on the horizon. But, there's a slowdown. So we're slowing down. The rest of the world is picking up. Hence the rotation.
Lower third:
No recession on the horizon, but there could be a slowdown as the rest of the world picks up.
Chris Hyzy
Should clients be thinking about increasing their exposure to the overseas markets, particularly non-U.S. developed markets?
Joe Quinlan
They should, Chris. It's now time to shift your gaze overseas. Look what's happening in Europe with the fiscal stimulus, the defense spending. China now is picking up not just promoting more investment, but now the consumer, the emerging markets are following suit.
So, there's a real push globally to drive growth, to really kind of catch up with the United States. So own both the United States and overseas.
Lower third:
There's a global push overseas to catch up with the United States.
Chris Hyzy
And there's a lot to catch up on.
Joe Quinlan
We're still neutral. We're looking for our opportunities. But I guess you I would suggest that we get more this year into 2026. More global growth. We're going to raise that allocation across the developed and developing markets.
Chris Hyzy
And we've recently closed out our underweight predominantly in the non-U.S. developed markets, largely speaking for what you just talked about. And now we're neutral. But we still, for home country biased investors, dollar-based investors, we're still overweight, the U.S.
Joe Quinlan
Still like the U.S, core holdings in the sense that the U.S. economy, let's face it, even with the growth overseas picking up, we're still U.S., the most resilient, dynamic, diversified, wealthiest economy out there. We can drive earnings, we can adjust. We're adaptable. Yes, there's policy uncertainty. But I wouldn't bet against the U.S. corporations working their way through them, and surprising on the upside.
Chris Hyzy
So let's take a trip with themes pulling through not just 25, 26… but all the way through into the next 4 or 5 years, if not decade. What is just developing out there in terms of big investment themes?
Joe Quinlan
One of the biggest, Chris, given the geopolitical problems, is defense. And defense spending in Europe is on an upswing. And it's belatedly, right? They've been really using the U.S. security umbrella for decades. Now they're taking their fate into their own hands. So defense spending in Europe but also Asia as well, across the board. So that's number one.
Lower third
Defense spending in Europe and Asia could be a long-term investment theme.
Number two: technology. Where there's a technology race between the United States and China.
Lower third:
Technology and infrastructure could be drivers for productivity across the world.
It's not going to go away anytime soon. It's going to be exciting for productivity probably across the world. So that's a very good global backdrop.
And then infrastructure. We're seeing infrastructure build out here in the United States across Asia. And of course there's a lot of work to be done. Infrastructure build out, renewable and traditional in Europe as well.
So, whether it's infrastructure, technology, global defense, there's a lot of opportunities.
Chris Hyzy
Joe, final point for those that are watching this right now, over the next six, nine months, what are the biggest trends that you think will likely occur and unfold through the summer and into the fall?
Lower third:
Don't underestimate the resiliency of U.S. companies.
Joe Quinlan
I think the biggest one, Chris, is that, you know, we started the year on our back foot here in the United States. But don't underestimate the resiliency of U.S. companies to adapt to policy uncertainty, to adapt to the tensions with Europe. The weaker dollar is actually a tailwind for their earnings.
So you and I can talk with our clients about our opportunities outside the United States. But I think the big kind of push out there, the big theme, is how the U.S. comes back.
Chris Hyzy
Joe, thanks for being here.
Joe Quinlan
You bet. Thank you.
Lower third:
Diversification is especially important during volatility, and international equities could help.
Chris Hyzy
We hope that you found this video useful. As you consider investment decisions for 2025 and beyond. Diversification across and within asset classes is especially important during periods of volatility, and international equities could help you get there. If you work with an advisor, they can help ensure that any investment decisions support a balanced portfolio built around your long-term goals.
And as global economies and markets continue to evolve, temporary softness in U.S. markets could be a time for rebalancing and strategically adding to your portfolio. Thanks for watching.
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[End of transcript]
2025 continues to surprise investors. Case in point: European and Chinese equity markets are on track to outperform the S&P 500 in the first quarter by the widest margin in decades.Footnote 1 Meanwhile, forecasts for economic growth in the U.S. have been lowered for 2025.Footnote 2
"Europe's resurgence is good news for corporate America, given the U.S.'s strong commercial ties with the continent," says Joe Quinlan, head of Market Strategy in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. "Against this backdrop, U.S. investors should consider investing in both U.S. large-cap firms with exposure to Europe and European equities themselves."
In the video above, Quinlan sits down with Chris Hyzy, the CIO's Chief Investment Officer, to discuss a range of potential international investment opportunities, as well as the possible impact of tariffs on future global growth. "The international markets can no longer be considered just an afterthought," says Hyzy. Still, he believes, "it's important to keep in mind that the U.S. remains a powerful long-term growth story."