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For much of the past decade, a common question I've heard and read is: Why should an investor own anything other than the S&P 500 index? The drumbeats have grown louder over the years as the index defied logic and outperformed without skipping much of a beat.
Near the tail end of 2024, the drumbeats intensified. As the MAG7 stocks continued to dominate, this in turn pushed the S&P 500 significantly higher. Many investors were convinced that this outperformance would continue and questioned the rationale of owning any other equity asset classes.
As I like to say, markets have a way of humbling investors when they least expect it. As seen on the chart below, the S&P 500 had quite a run, especially in 2023 and 2024. But the script flipped in 2025, as both European (EAFE) and emerging markets (EM) absolutely dominated their U.S. counterparts. Furthermore, the European small-cap index was up north of 37%, more than doubling the S&P 500 index!
This type of outperformance wasn't expected, and most investors were not properly positioned to take advantage. I know this because, according to the chart below from Bloomberg, European equities were severely underowned to start 2025, and many missed out on the best year for European equities since 2003!
The good news is that the momentum has not slowed as the European index has continued to outperform the S&P 500 index in 2026 (it’s early, but still). What’s even more promising, in my opinion, is that both U.S. mid caps and U.S. small caps have joined the party.
What we are starting to see is some breadth in market leadership, not just a handful of stocks pushing one index higher. Money seems to be rotating into other markets, which is a positive sign as this is what healthy markets should do.
From the start of 2025 to present (1/15/26), the returns for the indices are as follows:
S&P 500 Index: 19.1%
U.S. Small Cap Index: 19.7%
European Index: 35.3%
Emerging Markets Index: 39.8%
I don’t think anyone, myself included, thought that the laggard would be the S&P 500 index, especially after a breathtaking ~50% rally in 2023 and 2024. It seemed to have all the momentum in the world and yet has significantly lagged a few of its foreign counterparts over the past 13 months! And to be clear, this isn’t a scenario where the outperformance took place over a one- to two-month period. It has been pretty consistent since the start of 2025. This goes back to the adage of “It's not timing the market. It's time in the market.”
I always get a good chuckle when looking at these trends because they generally seem to happen when everyone least expects them. Case in point with U.S. small caps: Coming into the year, there was a lot of pessimism and, of course, an underowned asset class. While it’s way too early to claim victory, a ~7% gain and ~6% outperformance of the S&P 500 is a positive sign.
Momentum has an interesting way of working in the stock market. What was once left behind and undesired can become desirable on a whim.
With broad indices, you don’t own a few individual stocks, but rather hundreds, if not thousands, which means the long-term returns will come. But with that, there will be periods of underperformance relative to other markets. This is why we always preach diversification and rebalancing. For those who follow this plan, it has paid off in spades over the past year, and something tells me it will continue for the years and decades to come.
Sometimes it’s best not to overthink things. Just trust the process and let the rest take its course.
Feel free to discuss your situation with our financial planning firm.
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