Attractive returns and a breadth of opportunities are among the reasons the U.S. market historically reigns supreme among investors. However, one market watcher considers U.S. stocks to be expensive and is now seeking opportunities in cheaper markets with what he sees as better risk-adjusted returns. “We believe markets outside the U.S. are more attractive than the U.S. largely from a valuation perspective,” Kunal Kapoor, chief executive officer at Morningstar, told CNBC Pro earlier this month. His comments follow a stellar rise in U.S. stock prices this year, with the S & P 500 up 26% so far. “Many large U.S. stocks appear to be expensive and consequently are offering lower future returns,” Morningstar analysts wrote in a 2025 outlook report. Looking ahead to 2025, they noted that “asset-class valuation models point to low single-digit returns in the U.S.” Against this backdrop, the firm is maintaining its “market weight” stance on U.S. equities , but remains bullish on sectors like energy with cheap stocks trading at a discount to their fair value. “I’m not saying that investors should be completely looking outside the U.S. Instead, our recommendation is to maybe tweak their portfolio partially to overweight non-U.S. equities over the next say five to seven year-period as forward returns are likely to be higher outside the U.S.,” Kapoor explained. ‘Attractive pockets’ Going forward, Morningstar’s top executive is optimistic on markets like Japan and China which present “attractive pockets” of opportunity. Specifically, Chinese equities “stand out from a valuation perspective as there’s a gap between the fair values of many prominent companies relative to the price of their stocks today,” Kapoor explained. Morningstar’s optimism on China comes amid a slew of stimulus measures from the government , including interest rate cuts, lower cash reserve requirements at banks, looser property purchase rules and liquidity support for stock markets and, more recently, a debt swap program. Investing in the Chinese market does come with geopolitical uncertainties, the firm acknowledged, adding that “careful management of total portfolio exposure is crucial, including sizing aggregate positions to account for the various regulatory, geopolitical, and economic risks.” Morningstar sees opportunities in ” higher quality, moaty names ,” such as fast-food restaurant chain Yum China Holdings and tech giant Tencent . An economic moat refers to a company’s competitive advantage. ‘Pockets of undervaluation’ Over in Japan, Kapoor likes that the market offers “pockets of undervaluation.” Japanese markets have been on a downtrend recently, but the benchmark index Nikkei 225 — which includes the top 225 companies on the Tokyo Stock Exchange — is up 14.6% since the start of the year, while the Topix index has advanced 12.2%. Factors including a change in companies’ capital allocation strategies and the recently launched Nippon ISA program, which allows residents to invest in the stock market without paying taxes on dividends or capital gains, have put Japan in the spotlight for investors, Kapoor noted. “This is also why you see investors, like Warren Buffett, have taken big stakes in Japan,” he added.