The 10 largest companies in the S&P 500 now account for roughly 40% of the index, making an all-American portfolio far less diversified than many investors assume.
Schwab’s 2026 Long-Term Capital Market Expectations forecasts that developed international large-cap equities will outperform U.S. large-cap stocks over the next decade.
That projected gap may not look dramatic in any single year, but compounded over 10 years, it could create a meaningful difference for retirement portfolios concentrated almost entirely in domestic equities.
International stocks also had a strong recent reminder of their diversification potential, outperforming U.S. equities in 2025. And with low-cost international ETFs making global exposure relatively inexpensive, adding that diversification doesn’t necessarily require a major increase in investment costs.
The numbers raise an uncomfortable question: Are investors who remain overwhelmingly domestic actually as diversified as they think?
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Schwab projects international stocks to outpace U.S. equities through 2035
Schwab’s CME covers a full decade, with projections based on data through Oct. 31, 2025, spanning 2026 through 2035.
The headline numbers tell a clear story: developed international large-cap equities are projected to return 7.0% annually, and developed international small-cap equities are forecast to return 8.0%.
Both figures exceed Schwab’s 5.9% estimate for U.S. large-cap stocks, which ticked down from 6.0% in last year’s outlook as rising market prices outpaced improvements in the corporate earnings outlook.
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The international return advantage stems largely from more attractive valuations abroad, even though U.S. companies benefit from stronger earnings growth expectations.
International equities also offer higher expected dividend yields, which contribute a larger share of total returns than their domestic equivalents, Schwab noted.
Why S&P 500 concentration has changed the index’s risk profile
The gap between Schwab’s international and domestic return forecasts matters more when viewed against the structural risk that has quietly built up inside U.S. equity indexes.
The index’s top holdings, concentrated heavily in technology and growth stocks, now dominate a historically outsized share of total market capitalization, according to Schwab’s CME.
That concentration level raises questions about whether current prices reflect sustainable earnings growth or an emerging vulnerability.
Katherine Kellert, Head of Index Equity Product at Vanguard, said that the decade ahead favors non-U.S. markets because of their favorable pricing and income potential, U.S. NEWS reported.
<strong>Our 2026 outlook indicates that over the next decade, international equity markets offer strong risk-adjusted prospects, supported by low valuations and high dividend yields,</strong>
Schwab’s 2026 Mid-Year Global Outlook noted that a small group of companies tied to the artificial intelligence investment cycle is driving a disproportionate share of performance in both developed and emerging-market indexes.
First quarter earnings for the MSCI All Country World Index grew 24% from the prior year, more than double the 11% average over the preceding four quarters, the firm’s CME confirmed.
That growth was narrowly concentrated in semiconductor and digital platform companies, which makes the broader market more vulnerable if those firms fail to meet elevated expectations.
That narrowing of leadership compounds an already thin margin of safety for domestic-only portfolios.
The CME noted that the equity risk premium for U.S. large caps has fallen to roughly 2%, meaning investors are being paid less for taking on stock-market risk.
The index’s performance also depends heavily on a small group of companies maintaining the strong growth rates already reflected in their valuations.
Schwab’s international ETF offers a low-cost entry point
Schwab’s product lineup provides a straightforward way to act on the diversification case.
The Schwab International Equity ETF (SCHF) tracks the FTSE Developed ex US Index and holds 1,442 stocks from developed economies, including Japan, the United Kingdom, South Korea, and Canada.
The fund’s 0.03% expense ratio is among the lowest in the international ETF category. Its trailing 3.0% dividend yield is roughly double the 1.5% yield of the Vanguard Total World Stock ETF (VT), which provides exposure to both U.S. and international stocks in a single fund, according to The Motley Fool.
SCHF returned 28.6% through August 2026, compared with roughly 22.20% for VT over the same stretch.
One structural advantage of the developed international sleeve is sector composition, with financials, industrials, and technology more evenly balanced than the tech-heavy S&P 500, the Schawb’s CME showed.
That built-in sector diversity can serve as a natural hedge during periods when U.S. growth stocks underperform.
What Schwab’s decade-long return gap means for your allocation
J.P. Morgan’s rebalancing strategy found that a standard 60/40 portfolio shifted toward a 65/35 split in 2024, while U.S. equities’ share of global benchmarks rose by 5 percentage points, reducing international allocations.
J.P. Morgan suggested rebalancing toward international index funds as one immediate way to correct the imbalance.
Schwab’s CME, which projects a sustained return advantage for developed international equities over U.S. large caps through 2035, suggests that gap could compound into a meaningful difference in retirement wealth over the full decade.
Morningstar’s ETF research has noted that SCHF’s low fee and broad developed-market portfolio make it one of the more accessible entry points for investors looking to close that gap.
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