One of the biggest themes I’m focused on as we start the new year is the growing dominance of international equities relative to U.S. stocks.
Consider this for a moment. In 2025, the S&P 500 gained roughly 17%. By any normal standard, that’s an excellent year.
And yet, despite those strong returns, U.S. stocks still underperformed international equities by the widest margin since 1993.
That’s not noise. And it’s not something we see often.
The key question now is whether this was a one-year anomaly, a brief catch-up trade before U.S. stocks reclaim leadership.
Or whether this marks the beginning of a regime shift that investors will need to adjust to.
To answer that, we have to look at what’s actually driving the move.
And it starts with the U.S. dollar.
The Dollar Is the Driver
When I think about this rotation away from U.S. dominance and toward markets that are not used to leading, places like Europe, Asia, and Latin America, one chart stands out above the rest:
I’m down in Miami for a few days meeting with investors and talking through where new capital can go to work in this environment.
Yesterday alone, we probably flipped through a few hundred charts.
This one, shared by Alfonso De Pablos and Ricardo Sarraf, was easily the most important of the day.
The relationship is simple and powerful.
When the U.S. Dollar Index (DXY) is rising, the blue line falls. That tells us international equities are underperforming U.S. stocks.
When the dollar rolls over and starts to weaken, that relationship flips.
International equities begin to outperform, and the trend shifts away from U.S. dominance.
That dollar linkage is the backbone of the move we’re seeing right now.
Keep an Open Mind
It’s tempting to simplify this and call it a pure U.S. dollar story.
If the dollar rolls over, international outperformance turns into a longer-term trend. End of story.
But markets are rarely that clean, which is why we need to keep an open mind.
What happens if the dollar goes nowhere and chops sideways? Does this rotation lose momentum, or does it quietly persist anyway?
And what if the dollar breaks out above the 100 to 101 level? That would likely pressure this new trend and force an unwind in international outperformance.
That’s the framework I’m using to think about this move.
But the dollar is only part of the equation. The other piece is sector exposure.
Most international markets don’t have massive weights in mega-cap technology. Europe and emerging markets are far more concentrated in financials, industrials, and natural resources.
That matters.
This is not a dollar story or a sector rotation story. It’s both, working together.
So, yes, all eyes are on the U.S. dollar. If it moves lower or even stays sideways, I think international equities can continue to lead, potentially for a long time.
But if the dollar rips through 100 to 101, the playbook changes.
That’s the job.
Follow the evidence. Stay flexible. And be ready to adapt when the trend tells you to.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs