2025: Are International Equities and U.S. Value Stocks Back?

Key Takeaways

• Market Rotation and Performance in 2025: Contrary to expectations, international equities have outperformed U.S. equities by 11% in 2025, while U.S. growth stocks have declined by 10% and U.S. value stocks have risen by 2%. This shift highlights a significant market rotation across geography and style, with value stocks gaining favor over growth stocks.
• European Market Dynamics: European equities are benefiting from a combination of fiscal stimulus, improved economic data from China, and potential geopolitical stability. Germany's recent election has led to expanded fiscal stimulus, including a $546 billion infrastructure fund and increased defense spending. These factors, along with better cohesion across Europe post-Brexit, are providing tailwinds for European equities.
• Opportunities in U.S. Value Equities: Within the U.S. market, value equities, particularly in defensive sectors like healthcare, are performing well. The narrowing earnings gap and the sector's attractive characteristics, such as innovation and the growth of aging populations, are driving this performance. Active management strategies are seen as advantageous in navigating the volatile market environment.

2025: Are International Equities and U.S. Value Stocks Back?

Coming into 2025, many market participants were expecting a continuation of the themes which carried the market for the past several years. The consensus was U.S. exceptionalism was set to continue, with U.S. equities having outperformed non-U.S. equities in 13 of the 17 calendar years since the Great Financial Crisis in 2008.¹ Similarly, coming into the year growth stocks were largely favored over value, as excitement around AI had helped the Russell 1000 Growth Index outperform the Russell 1000 Value Index by 25% annualized over the last two calendar years.² However, fast forward to today and things have not played out as expected in 2025, with international equities outperforming their U.S. peers by 11%, while U.S. growth stocks are down 10%, compared to U.S. value peers up 2%.³ We took a closer look at the ongoing market rotation across geography and style, seeking to understand the drivers and where our active managers are finding potential opportunities.

The starting point for this 2025 race is crucial. Looking geographically, Europe trades at a significantly lower p/e valuation to the US market⁴, even after their fast start to the year, as can be seen in the chart below. For years, European equity markets have endured political and economic overhangs, including slow economic growth, alongside the drag from exposure to Chinese growth (which knocked 3.5-4% off European earnings in 2024).⁵ Geopolitical conflict has been a headwind for European equities as well, with elevated energy prices impacting both the consumer and industrial production.

In 2025 we have started to see some of these clouds lift, but even despite the strongest quarter for the MSCI EAFE benchmark in relation to U.S. equities since 2002⁷, just 7% of the flows which left the market in the past two years has returned.⁸ This would suggest there is further room for inflows to provide a tailwind. The backdrop has shifted after Germany’s election in February yielded a coalition government that has expanded fiscal stimulus including the recent passage of legislation that will create a $546B infrastructure fund; as well as eased borrowing rules to allow higher defense spending.⁹ The messaging from Germany is also very supportive for the European defense industry, with European defense stocks up 35% YTD.¹⁰ Indeed, the pledge from Germany to increase fiscal spending echoes other European countries with the UK government committing to an extension of the country’s defense budget.¹¹ This development has the potential to provide a tailwind to companies with exposure to defense spending, as well as domestic companies benefitting from broader fiscal spend including areas such as construction and engineering.

China’s focus on boosting consumption has returned and a pickup in consumer activity there can support both Chinese companies and those in Europe which derive revenue from China. Cohesion across Europe is a positive step after the fragmentation witnessed in the wake of Brexit. The confluence of fiscal stimulus, better economic data from China and potential peace in Ukraine are removing several overhangs for European equities. 

The tailwinds for Europe are also evident in the micro data. In Q4 2024, the most recent earnings season, sales beats in Europe were at a record high and broadly upgrades to numbers for 2025 have been positive.¹² This compares with the US where downgrades relative to upgrades are nearly double the long-term average heading into Q1 earnings for 2025.¹³ The iShares International Dividend ETF seeks to identify high quality companies outside the U.S. that pay attractive and growing dividends. The International Select Equity fund seeks international securities (primarily European equities) across benchmarks, sectors, market caps and countries. We are interested in companies exposed to the theme of fiscal expansion through holdings in companies such as one of the world’s leading construction materials producers, a company focused on building security such as locks and entrance automation, as well as a leading European industrial gases business supplying key inputs for a variety of applications including the manufacturing of plastics and chemicals.

Turning our attention to the U.S., while a broad swath of international equities has performed well YTD, finding opportunities within U.S. equity markets has been more challenging.¹⁴ Thus far in 2025, the market has rotated from a momentum led-rally to a market where value is performing well.¹⁵

In fact, U.S. large cap value equities are the only major U.S. index with positive returns YTD through 3/31/25.¹⁶ We believe one of the key reasons why the market rotation has broadened to include value equities is the narrowing of the earnings gap, as can be seen in the chart below.

Within value equities our investors are finding opportunities in defensive sectors such as healthcare. Healthcare is a sector that is considered “defensive” yet has several attractive characteristics, such as the secular growth of ageing populations around the world, extensive innovation as can be seen with the GLP-1 weight loss drugs, and attractive valuations. Amidst the fast-moving political environment, particularly new trade policies, value equities could have an additional tailwind from their tendency to derive a greater share of their revenue from the U.S.¹⁷

Market volatility can be unwelcome, but the sharp reversal in markets to start the year is a good reminder that diversification remains important.¹⁸ Within international equity markets, active strategies like the iShares International Dividend ETF, BIDD,¹⁹ as well as the International Select Equity Fund,²⁰ benchmarked against the MSCI ACWI ex US Index and the MSCI EAFE Index respectively, can help investors access non-U.S. companies, leaving the decision as to which countries and companies to allocate towards in the hands of the portfolio managers.

Within the value space, active strategies like the iShares Large Cap Value ETF, BLCV,²¹ seek to invest in companies thought to be undervalued that provide true value exposure. The active management of BLCV may be advantageous in volatile or shifting market environments, where a manager’s expertise in stock selection and risk management can potentially add value beyond benchmark performance.

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