EAFE’s Resurgence Highlights the Power of Geographic Diversification
Following years of U.S. equity leadership driven by AI-focused technology stocks like the Magnificent 7, 2025 has witnessed a shift in developed market performance dynamics. As of the end of September, the MSCI EAFE Index has generated a +10.8% active return versus the MSCI USA Index on a year-to-date basis, representing a notable change in relative performance patterns.
The MSCI EAFE Index’s outperformance over the MSCI USA Index stems primarily from two factors: Currency effects (+10.0%) reflecting broad dollar weakness amid persistent inflation and labor market volatility, and country allocation (+7.0%) including strong performance from Japanese equities (+1.7%) which have benefited from improvements in corporate governance.
Performance divergence may also reflect underlying structural differences in revenue exposure. Currently, companies in the MSCI EAFE Index generate approximately 22% of revenues from the U.S. (versus 15% in 2010), while the MSCI USA Index maintains roughly 61% domestic revenue concentration. Between 2010 and 2025, both indexes roughly doubled their China exposure to around 9%, but EAFE's broader geographic revenue distribution across multiple markets left it less vulnerable to disruptions stemming from escalating U.S.-China trade frictions. Meanwhile, U.S.-listed companies face greater concentration risk in these two increasingly volatile economies.
Taken together, these recent market dynamics highlight the strategic advantage of geographic and revenue diversification in portfolio construction. With lower concentration risk, greater geographic revenue diversification and reduced exposure to U.S.-China trade tensions than the MSCI USA Index, the MSCI EAFE Index may offer investors an opportunity to participate in developed equity markets that have a different risk profile to the tech-dominated U.S. market.
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MSCI EAFE Index
The MSCI EAFE Index is an equity index which captures large and mid cap representation across Developed Markets countries around the world, excluding the US and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
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