6 Big Questions Investors Are Asking About 2026 | Signal or Noise Ep 66

Hello, hello, everyone. Welcome back to “Signal or Noise.” Happy New Year, everyone. First episode of 2026, Episode 66. Charlie Bilello here. And with me, as always, Peter Maloik. Peter, start of each year, we get a million questions. We’re going to do our annual questions episode here. Six questions for 2026. Let’s start out with question number one.

A lot of people asking this. “Will international stocks lead again?” Not a question we’ve had many times in the last few years. In fact, it’s the first time. Because for the first time in a long time, we saw unbelievably strong international outperformance. What I’m showing you here is MSCI Europe, up 36%. Emerging market stocks, 34%. US stocks, still pretty good year, 18%. But this was the biggest gap that we’ve seen. You gotten go all the way back to 1993.

It was a 15% outperformance for the MSCI World ex US Index over the US stock market. Biggest outperformance and the best year for international stocks, Peter, since 2009. So before we talk about, can this continue, will it continue, what do you attribute to this happening in 2025? A lot of different explanations after the fact. What do you think was the big reason why we saw this outperformance?

I think what’s interesting is, I don’t think there is an explanation. So, if you look at going all the way back, you know, 2000, 2010, US stocks earned 0%. The S&P 500 return for that decade was 0%. Absolutely shocking. International emerging markets, real estate bonds, all had an incredible decade. So, then we went into the new decade, and everyone was pleasantly surprised. Everyone was like, “Oh, I’m just going to invest overseas. The US is dead. Emerging markets is where it’s at.” And from 2010, all the way for the whole decade, S&P 500 crushed everything, largely because of the tech revolution.

These big companies getting so big, but just US stocks just did generally better. So let me get to the next decade. You know, 2020, we’re going into 2021, and all the predictions, Goldman Sachs, BlackRock, Vanguard, everyone’s like, “Hey, the international had a decade, the US had a decade, we’re gonna rotate back to international.

The dividend yield’s better. The PE ratio’s better.

Every major metric is better. So international emerging markets is where it’s at.” And for the first five years of the decade, that was not the case. Just large US just kept outperforming, which is crazy because we know that small cap is supposed to do better than large cap over the long run. And overseas in the US should do about the same over the long run. And emerging markets has a higher growth rate and should do better over the long run. And we just didn’t see that for 15 years. And finally, just on a dime, the rotation started at the beginning of last year, and international stocks absolutely trounced the US. For the first time in a long time, I’m hearing my clients say, “Why am I not all international?” “Why don’t I rotate all international?” “International still trading at a steep discount up to the US.

Why am I not there?” And the answer is because we have no idea what’s going to happen in any given year, which is why we’ve gotten have money in both places. – So, let’s talk about this other question in terms of, can it continue? So often, after a big move, Peter, you hear people say, “Am I too late to the party here? Is it too late to diversify international if I’m not there or ready?” I’m just going to show you two charts that would illustrate that perhaps this could have legs, maybe not in 2026, but in the years to come.

One would just be looking at the ratio of US stocks to international stocks, which peaked at the end of 2024 at three standard deviations above the mean. But even after that huge outperformance in 2025, it’s only just a blip here, right? Because we had 16 years of US outperformance. So certainly on that basis, you could see a continuum. Here, I’m showing you, rolling five-year returns for US versus international. And still, if we’re looking at any time period longer than a year, basically, Peter, we’re still seeing us outperformance. So it’s 15 years now of rolling five-year outperformance for the US stock market, which is by far the longest in history. So I guess the best argument, I would say, that this could potentially continue is, this is still the early stages because it’s such a big outperformance that has come before it, and there’s still a pretty wide valuation gap.

So, here, we’re looking at the CAPE ratio between the US and European markets. US we know is near the highest level since 2000 at 39 times, and European markets still relatively cheap here at 22 times. What do you make of all this? Could you see this? Would you be surprised, I guess is the question, if international per outperformance would continue, maybe not in 2026, but in the next five or 10 years? Well, I wouldn’t be surprised either way because, you know, basically what we’re seeing is, European stocks, to your point, they’re a better value. That’s the bottom line. They’re better value right now than US stocks. That was the case last year. It’s the case of the year before last year.

It was the case before the year before last year. So just because something is a better value doesn’t mean that, in any given year, it’s going to outperform. But, like, look, if somebody’s asking me, you know, “Where’s the better value?” It’s obviously in Europe, but you can make a very big and solid argument as to why that is. You know, Europe has become much more socialistic.

The tax rates are extremely punitive in some of the countries. The social support network that they have for the immigration issues that they’ve got in Europe is putting a tremendous amount of pain on a lot of European countries. We’ve seen a couple countries borderline collapse like Greece. You know, some people are basically referred Europe as a museum. I don’t share that sentiment, by the way, but, I mean, it’s very different than a world where some guys tossing around an idea for OpenAI, and now the company’s probably worth a trillion dollars, right? There’s just a lot more innovation, a lot more capital formation, a lot more money behind ideas in the United States than anywhere in the world.

So you can argue that that discount in Europe exists for a reason, that it’s supposed to be at a discount. But bottom line is I think both markets are relatively fairly valued, and so it just wouldn’t surprise me either way. – Yeah, the ultimate question investors will have to answer this is, is the discount too much? Is an 80% discount too much given all of those facts? Let’s go to question number two here. “Will the average stock catch up?” So, unlike international, Peter, which saw this epic reversal in 2025, we did not see the same for the average stock in the S&P 500 or or small cap stocks.

We, in fact, we saw the S&P equal weight hit its lowest level on a ratio basis since 2003. So over 20-year low in terms of relative strength.

And if we look at the S&P equal weight, this is gonna be an interesting stat for people. The last three years, it has trailed the overall S&P 500, which is cap weighted by 34 percentage points. That is the biggest three-year underperformance for the equal weight in history. The prior record was 1997 to 1999. And following that, equal weight would outperform for seven straight years.

Small caps, as we know, long overdue for reversal, Peter. We’ve been waiting, talking about this many times in 2025. It did not happen. We saw the ratio of large to small hit its highest levels since the 1999 peak, almost a record high. And we saw small caps underperform for the fifth straight year.

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