For years, international stocks have been the investment equivalent of a perpetually disappointing date—they looked great on paper, but something always felt off. Sure, Europe and Japan traded at attractive valuations, but there was a reason they were cheap. No catalyst. No shareholder focus. Just value traps waiting to trap you.

That's changing, according to Jurrien Timmer, Director of Global Macro at Fidelity Investments. Speaking on a recent episode of the Facts Versus Feelings podcast, Timmer made the case that developed international equities have finally found the missing ingredient that kept investors circling back to the Magnificent 7 instead.

The Capital Allocation Revolution

The shift boils down to something simple but powerful: foreign companies have gotten "much smarter" about how they deploy capital. For years, European and Japanese firms hoarded cash or made questionable investments instead of returning money to shareholders. That era appears to be over.

"The payout ratio for the EAFE index… is now the same as in the US. It's 75%," Timmer noted, referring to the combination of dividends and stock buybacks as a share of earnings. This isn't just a one-time adjustment, either. The growth rate of these payouts over the last five years has actually been stronger internationally than in the U.S.

Think about what that means. International markets covering Europe, Australasia, and the Far East have quietly transformed their corporate cultures to prioritize shareholder value in ways that were unthinkable a decade ago. The low valuations that once signaled fundamental problems now reflect genuine opportunity.

The math is compelling: international stocks trade at a price-to-earnings ratio of roughly 15, compared to a steep 23 in the U.S. As Timmer put it, investors can now access "equal fundamentals for much better valuation." That's not a value trap—that's just value.

The Magnificent 7 Problem

Meanwhile, back in the U.S., the market has become uncomfortably concentrated. The Magnificent 7 stocks—Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet Class A (GOOGL), Alphabet Class C (GOOG), Meta (META), and Tesla (TSLA)—now account for approximately 36% of the S&P 500.

That concentration has driven impressive returns, no question. But it also creates significant downside risk. If the AI narrative loses steam or if valuations drift too far from underlying fundamentals, there's a lot of weight stacked on a relatively small number of companies. Timmer warns that this setup could become precarious, especially as expectations remain sky-high.

Why Not Small Caps?

The natural response to U.S. market concentration might be rotating into domestic small caps for diversification. Timmer isn't buying it—at least not yet. Small-cap margins remain compressed compared to their larger counterparts, which limits their appeal as a diversification play right now.

Instead, he advocates for looking overseas, where the combination of improved capital allocation and reasonable valuations creates a more compelling opportunity.

The Barbell Strategy

Timmer's recommendation is what he calls a "barbell" portfolio approach. Rather than abandoning U.S. tech exposure entirely, investors can balance high-growth domestic positions with cheaper, shareholder-friendly international stocks. The idea is to maintain upside participation while hedging against the volatility that comes with a top-heavy U.S. market.

It's a pragmatic middle ground. You're not betting against the Magnificent 7 or pretending AI isn't transformative. You're just acknowledging that 36% concentration in seven stocks might be a bit much, and that there are other companies in other countries that have figured out how to treat shareholders well—at a discount.

Performance Check: The Magnificent 7 in 2025

Here's how the Magnificent 7 stocks have performed year-to-date and over the past year:

The standout performers have been the Alphabet classes, with gains approaching 90% over the past year. Nvidia has continued its remarkable run with returns above 30%. But even within this elite group, performance has been uneven, with Amazon and Meta showing more modest gains in 2025.

The bottom line: after years of being cheap for all the wrong reasons, international stocks might finally be cheap for the right ones. Companies in Europe and Asia have embraced shareholder-friendly policies that were once the exclusive domain of U.S. firms. Combined with much lower valuations, that makes a pretty good case for diversifying away from a U.S. market that's betting heavily on seven names.

It's not about abandoning the Magnificent 7. It's about recognizing that the rest of the world just got a lot more interesting.