The S&P 500 index of leading U.S. shares has risen over 50% faster than the rate of international markets in the eight years since the financial crisis – and for good reason.

Early and aggressive monetary policies helped stimulate the U.S. economy and, most important, corporate earnings. In addition, the extraordinary confluence of innovation and capital in one corner of California continues to drive the global technology sector. Eight of the world’s top 10 tech companies are based in the United States.
Betting on America should continue to pay, but at current price levels, it’s difficult to see how it will pay quite as much, relative to either recent years or to other developed markets. U.S. equities are trading at 18 times their forward estimated earnings, compared with a 50-year average multiple of 15 times forward earnings (see chart below). At the same time, international markets have begun to outperform the S&P 500, as international foreign corporate earnings grow after many years of stagnation. Stock markets around the globe, including France, China, and India, have recorded bigger gains so far this year – and may continue to do so – but remain relatively cheap.
For U.S. domiciled investors, determining an international allocation is not obvious. Passively following the global benchmark would call for allocating about 50% of an equity portfolio in U.S. stocks. This strikes us as too low. The S&P 500 companies derive about 40% of their collective revenue abroad, providing U.S. investors with significant international exposure and minimal currency and political risk. In other words, betting on large U.S. corporations has been tantamount to betting on global growth, for U.S. dollar-based investors. As the third chart below shows, this approach has clearly paid off in the past 10 years.
However, it’s important to challenge complacency and rebalance portfolios that skewed too far in favor of the United States. International stock markets as a whole have outperformed the S&P 500 when the U.S. dollar is relatively cheap, which seems to us a distinct possibility over the next few years. (Indeed, as the charts below illustrate, returns on international stocks beat the U.S. market between January 1983 and December 1988 and again between January 2002 and December 2007.) We recently increased our allocation to international stocks to 30% from 25%, which seems to us about right at present.
In Europe, fears that Brexit will cause the European Union to unravel have greatly diminished after very different electoral results in the Netherlands and France. It may be that the isolationist policies in Britain – and in the United States, with the election of President Trump – have brought continental Europeans together, as they reaffirm shared values and strive to present a unified front in what can seem like a more fractured, dangerous world. At the same time, the economy’s growth rate is accelerating, unemployment is falling, corporate profits are on the rise, and the Euro has firmed against the U.S. dollar, while remaining at a rate helpful to European exporters. Europe as a whole is also a major beneficiary of low oil prices.
The picture is not quite as bright in Japan, where economic growth is constricted by severe demographic challenges. But there does appear to be a significant change in corporate culture and government regulation that is causing Japan’s major corporations to pay more attention to shareholder returns. Rising profit margins from persistently low levels is evidence of fundamental change.
GIM JA Summer 2017_Chart One_Page 4
GIM JA Summer 2017_Chart Two_Page 5
The emerging markets are, as always, more of a wild card. In China, the driver of most of the emerging economies, growth is clearly slowing and total debt levels are a concern, but the economy is still growing faster than most, and the authorities have proven adept at keeping the game going. (Click here for an interview with Matthews Asia.) India is another bright spot in Asia, with the potential to take the growth baton from China.
While actively managing a core U.S. equity portfolio is a core competence of ours, selecting stocks within the very diverse international markets is not. We gain exposure to the international markets by investing in both the enhanced passive and active strategies of firms that have demonstrated an ability to generate positive returns from international equity investments.
At present, we are adding the Artisan International Value Fund to our current holdings in the DFA International Core Equity Portfolio and the Matthews Pacific Tiger Fund. Artisan is an actively managed international fund with a strong, fundamental, value-oriented investment process that will complement the DFA fund, which is more closely tied to the benchmark.
The U.S. economy has performed relatively well during this slow-growth recovery and expansion, and we remain positive on U.S. equities in general. However, we are not complacent. A robust exposure to international stocks seems to us appropriate at this juncture.
John Apruzzese is the Chief investment Officer at Evercore Wealth Management. He can be contacted at

Evercore Wealth Management, LLC ("EWM") is an investment adviser registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. EWM prepared this material for informational purposes only and should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. It is not our intention to state or imply in any manner that past results are an indication of future performance. Future results cannot be guaranteed and a loss of principal may occur. This material does not constitute financial, investment, accounting, tax or legal advice. It does not constitute an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Specific needs of a client must be reviewed and assessed before determining the proper investment objective and asset allocation which may be adjusted to market circumstances. EWM may make investment decisions for its clients that are different from or inconsistent with the analysis in this report. EWM clients may invest in categories of securities or other instruments not covered in this report. Descriptions provided in this material are not substitutes for disclosure in offering documents for particular investment products. Any specific holdings discussed do not represent all of the securities purchased, sold or recommended by EWM, and the reader should not assume that investments in the companies identified and discussed were or will be profitable. Upon request, we will furnish a list of all securities recommended to clients during the past year. Performance results for individual accounts may vary due to the timing of investments, additions/withdrawals, length of relationship, and size of positions, among other reasons. Prospective investors should perform their own investigation and evaluation of investment options, should ask EWM for additional information if needed, and should consult their own attorney and other advisors. Indices are unmanaged and do not reflect fees or transaction expenses. You cannot invest directly in an index. References to benchmarks or indices are provided for information only. The securities discussed herein were holdings during the quarter. They will not always be the highest performing securities in the portfolio, but rather will have some characteristic of significance relevant to the article (e.g., reported news or event, a new contract, acquisition/divestiture, financing/refinancing, revenue or earnings, changes to management, change in relative valuation, plant strike, product recall, court ruling). EWM obtained this information from multiple sources believed to be reliable as of the date of publication; EWM, however, makes no representations as to the accuracy or completeness of such third party information. Unless otherwise noted, any recommendations, opinions and analysis herein reflect our judgment at the date of this report and are subject to change. EWM has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any such information becomes outdated, inaccurate, or incomplete. EWM’s Privacy Policy is available upon request. EWM is compensated for the investment advisory services it provides, generally based on a percentage of assets under management. In addition to the investment management fees charged, clients may be responsible for additional expenses, such as brokerage fees, custody fees, and fees and expenses charged by third-party mutual funds, pooled investment vehicles, and third-party managers that may be recommended to clients. A complete description of EWM’s advisory fees is available in Part 2A of EWM’s Form ADV. Trust services are provided by Evercore Trust Company, N.A., a national trust bank regulated by the Office of the Comptroller of the Currency and/or Evercore Trust Company of Delaware, a limited purpose trust company regulated by the Delaware State Bank Commissioner, both affiliates of EWM. Custody services are provided by Evercore Trust Company, N.A. The use of any word or phrase contained herein that could be considered superlative is not intended to imply that EWM is the only firm capable of providing adequate advisory services. This material does not purport to be a complete description of our investment services. This document is prepared for the use of EWM clients and prospective clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of EWM. Any unauthorized use or disclosure is prohibited. The Chartered Financial Analyst and CFA trademarks are the property of CFA Institute. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and CFP® in the U.S.

IRS Circular 230 Disclosure:

Pursuant to IRS Regulations, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for (i) the purpose of avoiding IRS imposed penalties or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. This information is provided for information purposes only and does not constitute financial, investment, tax or legal advice.

©2016 Evercore Wealth Management LLC. All rights reserved.