The S&P 500 delivered another strong year in 2025, returning approximately 16% following gains of 26% in 2023 and 25% in 2024 (source: S&P Dow Jones Indices, total return). While this three-year run has been remarkable, we believe the drivers of the next phase of market performance will look different from the last.
Last January, we shared several views with clients. Among these, we expected the Fed would likely begin easing in the second half of the year; the Fed did begin cutting rates in September (source: Federal Reserve, FOMC statement, September 2025). We also anticipated a narrowing of the large-cap/small-cap valuation gap, which did not materialize — the Russell 2000 underperformed the S&P 500 for most of the year (source: FTSE Russell, as of December 31, 2025). Not every view works, and these two examples are not a complete account of all positions or themes discussed with clients during the year. A full record of recommendations is available upon request. Past performance is not indicative of future results, and prior views that proved directionally correct do not guarantee the accuracy of our current outlook.
With that backdrop, we’ve begun shifting approximately 5–10% of client equity allocations into international developed markets. Valuations in these markets remain below U.S. levels on a forward price-to-earnings basis (source: MSCI, as of December 31, 2025), and the ECB has been cutting rates more aggressively than the Fed, with the deposit facility rate at 2.0% as of January 2026 (source: European Central Bank).
We view international developed markets as potentially attractive relative to U.S. equities over the medium term, though there is no assurance that this view will prove correct. This positioning carries meaningful risks. A strengthening U.S. dollar would erode international returns for U.S.-based investors. The valuation discount may reflect fundamentally lower growth expectations rather than a mispricing. Additionally, aggressive ECB rate cuts may signal deteriorating economic conditions rather than a tailwind for equity markets. Clients should also be aware that this reallocation may involve transaction costs and, for taxable accounts, potential capital gains tax consequences from liquidating domestic positions. International investing involves additional risks including currency fluctuation, political instability, differences in financial reporting standards, higher fund expense ratios, foreign withholding taxes on dividend income, and potentially wider bid-ask spreads compared to domestic investments.
The opinions expressed herein are those of John Doe Consulting, LLC as of January 15, 2026 and are subject to change without notice. Past performance is not indicative of future results. This commentary discusses our current investment views and portfolio positioning. It is intended for informational and educational purposes and should not be construed as personalized investment advice for any individual client. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance, or be suitable for a client’s individual situation. International investing involves additional risks including currency fluctuation, political instability, and differences in financial reporting standards. The investment themes discussed in this commentary are selected examples and do not represent all investment advice or recommendations provided to clients. John Doe Consulting, LLC is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. For additional information, please visit our website or refer to our Form ADV Part 2, available upon request.
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