International large caps could win big in the future

Rinvesting in retirement is a marathon, not a sprint. This is done over decades and requires staying disciplined in the face of current market volatility and geopolitical events and looking beyond what is currently working well for investment opportunities.

Citing a commentary by Charles Schwab Investment Advisory, a SmartAsset article notes that international large-cap stocks are expected to outperform US small- and large-cap stocks over the next 10 years, although they have lagged both classes. assets over the past 50 years. Between 1970 and 2021, the S&P 500 has gained 11.1%, compared to 8.7% for the MSCI EAFE index over the same period. Either way, Veeru Perianan, director of multi-asset research at Charles Schwab, predicts that international large caps have a better chance of outperforming over the next decade.

“We take a forward-looking approach to predicting returns, rather than basing our estimates on historical averages,” Perianan wrote. “Historical averages are less useful because they only describe past performance. Forward-looking performance estimates, however, incorporate expectations for the future, and for this reason we believe they are more useful in making investment decisions or projecting future performance than using historical results.

Charles Schwab predicts that international large-cap stocks will produce total returns of 7.5% by the end of 2031, while US large-cap stocks are expected to produce returns of 6.4%. And while the Russell 2000 Index will fare slightly better, at 6.8%, it will continue to underperform international large caps. Perianan believes this is because domestic stocks are likely overvalued relative to international stocks.

The S&P 500 rose 27% in 2021. However, Perianan notes that the future growth of large-cap domestic companies has been priced in “to a much greater extent” than their international counterparts.

“The difference is mainly due to differences in valuation between US stocks versus international stocks,” he added. “International equities are generally riskier than US equities and investors expect to be compensated for taking on this additional risk. However, we believe that markets have discounted this risk beyond what the fundamentals suggest. »

The SmartAsset article notes, however, that these projections were created before Russia invaded Ukraine. However, a spokeswoman for Charles Schwab said Perianan’s analysis is based on long-term fundamentals and should not be viewed as a short-term tactical forecast.

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