Markets & Regrets: A 2026 Outlook

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So, 2025 happened. The S&P 500, that familiar collection of hopes and anxieties, managed a 16.4% climb. Not bad, for a system built on, well, nothing much at all. But international stocks? They did even better. A 32.6% jump. A little surprising, maybe. Like finding a twenty-dollar bill in an old coat. It happened because the dollar weakened, and folks started looking elsewhere, maybe because of trade squabbles. It’s always something.

For two decades, U.S. stocks have hogged the spotlight. But diversification, that sensible idea, keeps popping up. International stocks had their moments before – the mid-2000s, for instance. History, if you bother to look, offers a few clues. It’s just that most people don’t bother.

Now, the question is: can they keep it up? Can international stocks outperform in 2026 and beyond? Robert Shiller, a fellow who won a Nobel Prize for figuring out things about markets, has some thoughts. It’s a long way from solving world hunger, but it’s a start.

Is the American Engine Starting to Sputter?

The S&P 500 had a good year, yes. But the two years before that were…remarkable. A 26.3% jump, then another 25%. Since 2009, it’s averaged 14.8% a year. That’s above the historical average. It’s like a machine running a little too fast, and you know something’s going to wear out.

Stock prices have climbed more than twice as fast as earnings. Which means…well, it means things are a little stretched. The price-to-earnings ratio is high, reminiscent of the dot-com bubble. We all remember that, don’t we? Or maybe we’ve blocked it out. Large-cap stocks are trading at 22 times earnings. It’s a lot to ask of the future.

Shiller likes to look at long-term, inflation-adjusted earnings. He created something called the CAPE ratio – cyclically adjusted price-to-earnings. It smooths out the bumps, gives you a longer view. It’s a sensible idea, really. Trying to see past the noise.

Right now, the CAPE ratio is above 40. It was that high only once before – during the dot-com bubble. So, Shiller sees muted returns for the S&P over the next decade. He’s predicting around 1.5% a year. That’s barely keeping up with inflation. So it goes.

High valuations are the problem. Even with strong earnings growth, stocks might face something called “multiple compression.” It’s a fancy way of saying prices might come down. It’s just math, really.

Of course, there’s a range of possibilities. Shiller’s 95% confidence interval goes up to 10.7% – around the S&P’s historical average. But it also goes down to a negative 7.7%. It’s a gamble, like everything else.

Other Markets Look…Less Enthusiastic

While U.S. stocks are priced like they’re going to solve all the world’s problems, Europe and Japan haven’t gotten quite so carried away. Even after a good year, international stocks look relatively cheap. It’s like finding a used car that actually works.

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But there are reasons for that. Europe and Japan haven’t jumped on the artificial intelligence bandwagon as much. Most of the AI stocks are traded here. And they’re not as friendly to corporations. The U.S. has lots of capital and low taxes. Europe and Japan…not so much.

Still, international stocks look more appealing because they’re closer to their historical CAPE ratios. Shiller expects European stocks to return 8.2% a year, and Japanese stocks 6.5%. Although the Japanese market had a bubble in the 1980s, which might skew the forecast. Bubbles always leave a mess.

So, Shiller thinks international stocks can keep outperforming. If you’re looking to capitalize on that, you could consider index funds like the Vanguard Total International Stock ETF (VXUS 1.59%), the iShares Core MSCI Europe ETF (IEUR 0.91%), or the Franklin FTSE Japan Hedged ETF (FLJH +0.86%). They’re all low-cost options for diversifying your portfolio. It’s a small step, maybe, but it’s a step nonetheless. And in the grand scheme of things, what isn’t?

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2026-01-31 22:33