Wall Street's Hunt for Cheaper Stocks Goes Global

This analysis examines the growing shift in global capital allocation away from historically expensive U.S. equities toward more attractively valued international markets. The confluence of elevated U.S. valuations and accelerating dollar weakness has created what Morningstar characterizes as a compelling structural opportunity in international equities [1][2]. The data reveals that emerging markets are trading at approximately a 40% discount to U.S. equities while offering similar or superior earnings growth prospects, with 29% projected earnings growth in 2026 compared to 14% for U.S. equities [2][7]. This report synthesizes market data, valuation metrics, and investment flow trends to provide decision-makers with a comprehensive understanding of this significant market rotation.

The U.S. dollar index (DXY) experienced significant weakness on February 9, 2026, falling 0.79% to approximately $96.86, extending its year-to-date decline to roughly 1.2% [4][5]. The currency touched a four-year low around the 96 level in late January 2026, with weakness accelerating amid policy uncertainty and geopolitical tensions [6]. This decline has been particularly notable given the dollar’s traditional safe-haven status and its role as the primary reserve currency for global financial systems.

China’s recent advice to financial institutions to limit exposure to U.S. Treasury securities reflects growing unease among major economies about concentrations in dollar-denominated assets [5]. This development carries significant implications for global capital flows and could accelerate diversification trends already underway. The combination of fiscal concerns in the United States and increasing attractiveness of alternative reserve assets has created a supportive environment for dollar weakness.

For international equity investments, this dollar weakness creates what investors term a “double discount”—foreign assets become cheaper for dollar-based investors while simultaneously boosting the dollar-denominated returns of foreign holdings when converted back to U.S. dollars [2][7]. This currency tailwind has been a significant contributor to the international equity outperformance observed year-to-date.

Multiple valuation metrics indicate that U.S. equities remain historically expensive relative to both their own historical averages and international counterparts [8][9]. The forward price-to-earnings ratio for major U.S. indices remains elevated above long-term averages, while the Cyclically Adjusted Price-to-Earnings (CAPE) ratio continues to trade above its long-term median. The market capitalization-to-GDP ratio, also known as the Warren Buffett indicator, has generated historically high readings that have attracted scrutiny from valuation-sensitive investors.

This valuation gap between U.S. and international markets has reached levels that historically precede significant capital rotations [2]. According to Morningstar research, U.S. stocks comprise 62% of the Morningstar Global Markets Index of developed- and emerging-market equities, while U.S. GDP represents roughly 25% of the global economy [2]. This structural overweight has created what many institutional investors view as significant mispricing opportunities in international markets where valuations remain more reasonable relative to economic fundamentals.

The S&P 500 has generated a modest return of approximately 1.26% year-to-date through February 9, 2026, significantly underperforming international benchmarks [15]. This performance differential has prompted many institutional allocators to question the risk-reward proposition of maintaining overweight positions in U.S. equities when international alternatives offer similar growth potential at substantially lower valuations.

The market data strongly supports the rotation thesis with international indices significantly outperforming U.S. benchmarks across both developed and emerging markets [10][11].

The MSCI Emerging Markets Index has gained approximately 7% year-to-date in 2026, following an impressive 34% return in 2025 [7][10]. This continuation of strong performance suggests the emerging market rally is more than a short-term phenomenon. The Taiwan Weighted Index has been particularly strong, gaining 10.7% year-to-date and 36.2% over the past six months [11]. China has also re-emerged as one of the better-performing equity markets, attracting renewed investor interest after a period of relative underperformance [12].

The MSCI EAFE Index, which tracks developed markets outside North America, has gained 5.2% year-to-date and 16.3% over six months [10][11]. Japan’s Nikkei 225 has been a standout performer, gaining 5.9% year-to-date and reaching all-time highs, including a notable 3.9% gain on February 8-9 alone [13][14]. European markets have also demonstrated solid performance, with the Bloomberg Euro 500 up 3.1% year-to-date and the FTSE Eurotop 100 advancing 3.2% year-to-date [11].

Even within U.S. markets, leadership has shifted notably toward smaller-capitalization stocks. The Russell 2000 Index of small-cap stocks has gained 7.92% year-to-date, significantly outperforming the S&P 500’s 1.26% gain [15]. Additionally, the equal-weighted S&P 500 has hit fresh records while the cap-weighted index has been constrained by technology sector declines [16]. This internal U.S. market rotation toward value-oriented and smaller-capitalization stocks aligns with the broader “Sell America” thesis and suggests a more fundamental shift in market leadership.

The sector performance data from February 9, 2026, reveals rotation patterns consistent with the international investment thesis [15][17]. Utilities advanced 2.09%, reflecting defensive rotation as investors sought more stable returns amid shifting market leadership. Basic Materials gained 1.81%, benefiting from commodity-linked exposure to global growth expectations. Technology showed mixed performance with a 1.60% gain, partially offset by software sector weakness that saw software stocks fall 7.75% last week and 15% over two weeks [16].

Healthcare declined 0.14%, sensitive to Novo Nordisk guidance weakness, while Consumer Defensive fell 0.76% as reduced risk aversion diminished the appeal of traditional defensive positions [15]. This sector rotation pattern—with value-oriented and international-sensitive sectors outperforming growth and defensive sectors—aligns with the “Sell America” thesis and suggests institutional investors are repositioning portfolios in anticipation of continued international outperformance.

Morningstar’s European fund data reveals that emerging markets and European equities represent the fastest-growing investment categories over the past 12 months—the first year in decades where the majority of global equity flows went outside the United States [2][12]. This represents a fundamental shift in institutional allocation strategy that may have longer-term implications for global capital markets. The magnitude and persistence of these flows suggest this is not merely a tactical rotation but potentially a structural reallocation driven by fundamental valuation differentials.

The earnings growth expectations for emerging markets present a compelling investment case. Emerging market earnings are projected to grow 29% in 2026, more than double current expectations of 14% growth for U.S. equities [7]. This earnings growth differential provides fundamental support for the valuation arbitrage thesis that U.S. and international markets should converge from current extreme differentials.

Morningstar’s 2026 Global Investment Outlook characterizes dollar weakness as “likely entering a more prolonged period of cyclical weakness,” though analysts emphasize this represents “not a secular decline” [2][20]. This nuanced view suggests the international rotation may have further room to run, but investors should remain alert to potential dollar rebounds that could temporarily reverse the trend.

The currency dynamics are particularly important for U.S.-based investors considering international allocations. A further dollar decline would enhance international equity returns through both capital appreciation and currency translation effects. However, investors should recognize that currency movements can be volatile and unpredictable, introducing an additional layer of risk to international allocations.

Japan’s equity market has been a particular beneficiary of the international rotation, with the Nikkei reaching all-time highs supported by Prime Minister Takaichi’s election victory [14][19]. The “Takaichi trade” has attracted significant attention from global investors, though policy developments warrant monitoring given potential fiscal and currency implications. The strengthening Japanese market has also benefited from the yen appreciation against the dollar, creating positive feedback loops for international investors.

The broader Asia-Pacific region has demonstrated strong performance, with Taiwan’s technology-heavy index leading gains [11]. This regional strength reflects both valuation opportunities and specific sectoral developments, particularly in technology hardware where Asian manufacturers maintain significant competitive advantages.

Despite current weakness, the U.S. economy continues to demonstrate structural advantages that have historically supported premium valuations [18]. Innovation leadership, capital market depth, and the “strongest fixed income market” globally provide fundamental support for U.S. assets [18]. A reassessment of dollar and U.S. equity risks by global investors could reverse capital flows relatively quickly, particularly if U.S. economic data surprises to the upside or policy clarity improves.

The concentration of U.S. market gains in a relatively narrow set of large technology companies has been both a strength and potential vulnerability. When these leaders stumble, as software stocks did in recent weeks, the broader market feels the impact [16]. However, this concentration also means that positive developments in the technology sector could quickly reverse the international rotation.

Currency movements are highly sensitive to geopolitical developments, including policy uncertainty from Washington and potential trade disruptions [5]. The “Sell America” trade carries significant currency exposure risk that investors must carefully consider. China’s advisory on Treasury exposure represents just one example of how geopolitical dynamics can rapidly alter investment landscapes [5].

The upcoming Federal Reserve Chair nomination process, with Kevin Warsh’s nomination introducing some dollar stabilization, represents a policy development that warrants monitoring [3]. Further clarity on U.S. monetary and fiscal policy could significantly influence dollar direction and, consequently, the attractiveness of international versus domestic investments.

Emerging market indices remain dominated by large technology stocks from North Asia, creating concentration risks that mirror concerns about U.S. market concentration [7]. Investors seeking diversification through emerging market allocations should be aware that they may be inadvertently maintaining significant technology exposure through international vehicles.

Additionally, emerging market earnings growth expectations of 29% are ambitious and subject to significant execution risk [7]. Any disappointment relative to these projections could reverse emerging market outperformance and challenge the thesis supporting the international rotation.

Options markets are pricing meaningful expected moves around key data releases and corporate earnings, suggesting volatility could increase sharply [17]. This elevated volatility could test the durability of international equity flows and potentially trigger short-term reversals even if the fundamental thesis remains intact.

The BBB spreads at approximately 96 basis points and High Yield spreads at approximately 661 basis points remain steady, suggesting no immediate credit stress [9]. However, credit market conditions can deteriorate rapidly, and monitoring these indicators remains important for assessing overall market health.

The February employment report and Consumer Price Index figures due this week could significantly influence Federal Reserve policy expectations and dollar direction [5][19]. Strong data could support dollar stabilization, while weak data could accelerate the international rotation.

The Fed Chair nomination process and subsequent policy signals will be critical for dollar and U.S. equity sentiment [3]. Any indications of policy shifts that could affect interest rate expectations or economic growth trajectories will influence capital flows.

Prime Minister Takaichi’s election victory introduces potential fiscal and currency policy shifts affecting the “Takaichi trade” [14][19]. Investors should monitor Japanese policy announcements for implications on currency and equity markets.

The recent weakness in software stocks, with the 15% decline over two weeks, warrants monitoring to determine whether this rotation deepens or reverses [16]. Technology sector dynamics remain critical for overall market performance.

Continued monitoring of credit spreads and bond market conditions will provide important signals about overall market risk appetite and potential stress points [9].

The Wall Street Journal’s February 9, 2026 report captures a genuine structural shift in global capital allocation. The combination of elevated U.S. valuations and dollar weakness has created a compelling risk-reward environment for international equities that many institutional investors are actively exploiting. Year-to-date performance data strongly supports the international rotation thesis, with emerging markets and international developed markets significantly outperforming U.S. benchmarks.

However, investors should approach this analysis with appropriate professional skepticism. The “Sell America” trade has gained significant traction, raising questions about sustainability, particularly given the historical tendency for U.S. markets to eventually reassert leadership. The structural advantages of the U.S. economy—including innovation leadership, capital market depth, and the strength of its fixed income markets—remain meaningful and could reassert themselves under certain conditions.

The key for decision-makers is to recognize that the current international opportunity appears grounded in fundamental valuation differentials and earnings growth expectations. The 40% discount at which emerging markets trade relative to U.S. equities for “pretty much the same earnings growth” represents a significant opportunity [12]. However, investors should remain attentive to U.S. economic data releases, Federal Reserve policy signals, and the potential for dollar stabilization that could test this rotation thesis. The cyclical nature of currency movements and market leadership shifts suggests that flexibility and ongoing monitoring will be essential for navigating this evolving market environment.