For many state pensions that sought growth outside the U.S., the bet is paying off.

Strong gains in non-U.S. and emerging market equities have helped propel several public plans like the Louisiana State Employees’ Retirement System and New York State Common Retirement Fund to double-digit returns for their 2026 fiscal years (18.4 percent and 11.9 percent, respectively).

Louisiana State chief investment officer Bobby Beale attributed much of the $18.7 billion plan’s strong return to “broad strength in equities.” While domestic equities returned 27.4 percent, Louisiana’s emerging market and international small-cap holdings returned 48.7 percent and 31.8 percent, respectively. The plan’s 2025 report lists three active managers — City of London, Westwood, and LSV — in charge of its emerging market holdings; China is the top exposure. Louisiana State allocates 20.1 percent to international stocks overall.

Meanwhile, New York State’s annual return was also boosted by its roughly 13 percent allocation to non-U.S. equities, which returned 24.41 percent for the fiscal year. The $295.4 billion state fund invested $1.4 billion in overseas equities earlier this year, allocating $700 million each to an emerging markets fund managed by RBC and the MFS International Growth Equity Fund.

Louisiana and New York aren’t the only state plans to see a boost from public international markets: Both of California’s state employee plans posted strong performance thanks to big gains in global stocks. The $637.1 billion California Public Employees’ Retirement System (CalPERS) returned a net 14.8 percent for the 12-month period ending June 30, while the $415.4 billion State Teachers’ Retirement System (CalSTRS), which is looking to expand further into emerging markets through its partnership with active manager ABS Global, returned a net 13.9 percent for its latest fiscal year. The state plans for Maryland and Rhode Island also saw their annual returns get a lift from international stocks.

 

Tailwinds For Quality Growth

After years of U.S. stocks leading global equity markets, many institutional investors have increased their allocations overseas, drawn by more attractive valuations, concerns over U.S. policy uncertainty, and signs that the hegemony of American large-cap tech stocks may be fading. While the S&P 500 rose by nearly 18 percent over 2025, the MSCI World ex USA Index went up by nearly 32 percent last year, while the MSCI Emerging Markets Index saw a gain of almost 34 percent. 

In an environment favoring value-oriented and cyclical exposures, many traditional quality growth managers are feeling the wind at their backs. According to NEPC’s head of marketable equity research Nedelina Petkova, strong performance from financials, industrials, and defense-related businesses and ongoing improvements in Japan have helped international developed markets. Plus, Petkova wrote that EAFE (Europe, Australasia, and the Far East) performance “has been less dependent on a small number of technology companies and reflects a broader set of economic drivers than the U.S. market.”

Meanwhile, several market trends have shaped emerging market performance this year. Many active managers were hurt by the sharp underperformance of quality stocks. Portfolios that were overweight India and China and underweight Korea also lagged, as Korea outperformed both markets. 

Beyond this year’s specific drivers, some investors see broader structural forces supporting international and emerging markets over the longer term. Rich Nuzum, head of OCIO at Franklin Templeton, explained over email that “while much has been written about trade tensions and some pundits continue to talk about deglobalization,” foreign direct investment flows across the international and emerging markets excluding the U.S. and China “generally continue to increase rapidly.” 

Nuzum added that “the rapid growth of wealth, and of a middle class of consumers, across emerging markets, is an additional tailwind.”

 

Reality Minus Expectations

While the consensus among investors is that macroeconomic and geopolitical factors have fueled the rise in international stocks, Joel Schneider, deputy head of portfolio management for North America for Dimensional Fund Advisors, takes a contrarian position: He argues that what investors expect about a company can often be as important as its fundamentals — if not more so. 

“People always think it’s GDP growth or interest rates or geopolitics,” said Schneider. “It’s not what people think. The simplest equation for performance is ‘Reality Minus Expectations.’”

After testing scores of macroeconomic variables in categories including GDP, unemployment, interest rates, or a country’s trade surplus, Schneider found that none of these factors were predictive of the next year's stock returns. This is why attempting to time regions is really risky, because there’s no persistence with performance. 

“The best performing country one year can be the worst performing the next year,” he said, adding that it's not uncommon for there to be greater than a 50 percent difference in returns between the best and worst performing emerging markets.

For years in developed markets, when small banks in countries like Italy or Spain struggled, investors had lowered their expectations so much that when those banks started to perform slightly better than expected, their stock prices soared. 

“Reality has turned out slightly better than expectations for a number of these companies,” Schneider said. “This is why valuations matter and why being broadly diversified matters.”