International equities enter a new leadership cycle: ClearBridge argues structural and cyclical forces are converging

Earnings revisions: the emerging markets edge

The central plank of ClearBridge’s argument is earnings momentum rather than valuation alone. While the valuation discount between US and international markets remains at historically wide levels, Schulze identifies a more actionable signal: the direction and magnitude of earnings revisions.

“Improving earnings expectations, attractive relative valuations and a broader set of macro catalysts suggest non-U.S. equities may be entering a more durable period of leadership,” says Schulze.

Critically, the earnings upgrade cycle is most pronounced in emerging markets. Revisions to the MSCI Emerging Markets Index have outpaced those seen in the US, Europe and Japan, a sequencing that historically correlates with sustained relative outperformance.

“Earnings revisions for the MSCI Emerging Markets Index have moved materially higher, outpacing the improvement seen in the U.S., Europe and Japan,” says Schulze. “That matters because earnings momentum is often a key driver of sustained market outperformance.”

The source of that earnings upgrade is significant. Artificial intelligence infrastructure demand is creating a substantial pull-through effect. The beneficiaries are the companies and economies supplying the physical and technological inputs for the global AI buildout, and many of these are domiciled outside the US.

“In our view, emerging markets remain well positioned to benefit from continued demand tied to the AI buildout, and particularly the companies and countries providing the infrastructure, components and power needed to support that expansion,” says Schulze.

Valuation discount and currency dynamics

Even after recent gains in international indices, US equities continue to trade at a premium to non-US counterparts that remains wide by historical standards. ClearBridge characterises this as a meaningful source of asymmetric upside, contingent on continued fundamental improvement.

“Even after recent gains, the discount between U.S. and non-U.S. markets remains historically wide, leaving room for further upside if fundamentals continue to improve. A softer U.S. dollar would add another tailwind, as dollar weakness has historically supported non-U.S. equity returns by easing financial conditions and improving capital flows into overseas markets,” says Schulze.

The currency dimension is particularly relevant for Australian-based institutional allocators. A depreciating US dollar has historically amplified returns on unhedged international equity exposure. It does so by compressing the currency headwind that US dollar strength had imposed on non-US assets.

For funds with currency hedging overlays, the calculus shifts, but the underlying equity return argument remains.

Monetary policy and geopolitical resolution as catalysts

ClearBridge identifies a policy scenario that could provide additional near-term support for international equities. This combines US Federal Reserve accommodation with lower long-term rates. A durable resolution in the Middle East could reinforce both.

“If monetary policy in the U.S. becomes more accommodative and long-term rates move lower due to a durable resolution in the Middle East, that combination could provide additional support for international equities broadly,” Schulze says.

For institutional investors modelling scenario outcomes, this pathway represents a plausible near-term catalyst. It sits alongside the more structural arguments Schulze advances elsewhere in the outlook.

Structural forces: sector composition, commodities and China

Beyond cyclical dynamics, ClearBridge identifies structural forces at work. These could make the current period of international leadership more sustained than prior episodes of non-US outperformance.

The first is sector composition. International equity benchmarks carry materially higher weights to cyclicals, specifically financials, industrials, energy and materials. US indices, by contrast, remain heavily concentrated in technology and communication services.

“International markets generally offer greater exposure to cyclical sectors such as financials, industrials, energy and materials, which may benefit in an environment of firmer inflation, higher nominal growth or rising fiscal support outside the U.S.,” says Schulze.

Structurally firmer inflation and expanding fiscal programmes in Europe and Asia are reshaping the macroeconomic backdrop. In this environment, the sector composition of international benchmarks could serve as a persistent tailwind rather than a transient one.

The second structural force is the commodity cycle. Data centre construction, grid modernisation and the renewable energy transition are generating sustained demand for metals, minerals and energy resources. This cycle disproportionately benefits resource-exporting emerging economies.

“A commodity upcycle tied to data center construction, grid modernization and renewable energy investment could also disproportionately benefit many international and emerging economies, particularly those with meaningful metals and resource exposure,” Schulze notes.

China, AI diffusion and the broadening of structural support

The third force is China. A durable recovery in Chinese consumer demand remains a key variable. Should it materialise, the spillover potential across regional supply chains and equity markets throughout Asia would be significant.

“A recovery in Chinese consumer demand would have meaningful spillover effects across global supply chains and regional equity markets,” says Schulze.

Finally, ClearBridge raises a more nuanced point about the diffusion of AI-related productivity gains. The current narrative around AI has been heavily concentrated in a small number of US mega-cap technology firms. Over time, Schulze argues, the productivity benefits of AI are likely to broaden. This would reduce costs and improve efficiency for firms outside the US across a range of industries.

“The continued democratisation of AI could improve productivity and reduce costs for companies outside the U.S., broadening the benefits of technological innovation beyond a narrow group of mega cap winners,” he says.

Portfolio implications

ClearBridge’s mid-year view makes a materially more constructive case for international and emerging market equities than mean reversion alone would suggest.

Improving earnings revisions, persistent valuation discounts, supportive macro policy and multiple structural tailwinds are converging. Together, they present a framework institutional investors should assess carefully against their current allocation postures.

For asset consultants and portfolio managers still underweight international equities, the more challenging question may no longer be whether the opportunity exists. It is whether current benchmark weights adequately reflect a world in which US exceptionalism is fading as a structural thesis.

“The opportunity in international equities is no longer just about valuation support or mean reversion. It is increasingly supported by improving earnings, favorable macro conditions and multiple pathways to broader market leadership,” Schulze concludes.

The conditions for a sustained re-rating are assembling. Whether institutional portfolios are positioned to capture it is a separate and more urgent conversation.