Global Equity Rotation in Q2 2025: The Case for International Growth Stocks

The second quarter of 2025 has been a period of profound recalibration in global equity markets. Amid the turbulence triggered by the Trump administration’s abrupt tariff announcements—dubbed “Liberation Day”—investors have been forced to re-evaluate long-held assumptions about risk, diversification, and the relative value of domestic versus international assets. The result has been a striking shift in portfolio allocations, with international growth stocks emerging as a compelling focal point for those seeking to navigate the new landscape of uncertainty and opportunity.

The Catalysts for Rotation

The initial shockwaves from the tariff declarations sent global equity markets into a tailspin, with the S&P 500’s beta dropping to a record low of 0.52 as investors retreated to defensive positions [1]. However, this sell-off was not uniform. While US large-cap growth stocks—particularly in technology—rebounded sharply (up 23% in Q2), the broader market’s sensitivity to US-centric benchmarks waned. Meanwhile, the weakening US dollar, which fell 6.8% against a basket of major currencies, acted as a tailwind for non-US equities. International portfolios increased their non-US equity allocations from 17.2% to 18.3%, a modest but significant shift given the scale of global capital [1].

The MSCI World Ex-U.S. Index outperformed the MSCI U.S. Index by 15% in Q2—the largest calendar-year gap since 1993 [3]. This divergence reflects a broader repositioning toward international markets, where valuations remain compelling. At 14x forward earnings, non-US equities trade at a 36% discount to their US counterparts, which command a 22x multiple [4]. This valuation gap, combined with the dollar’s weakness, has created a powerful arbitrage opportunity for investors willing to look beyond the familiar corridors of Silicon Valley and Wall Street.

Sectoral Shifts and Strategic Opportunities

The rotation has not been confined to geography but has also reshaped sectoral dynamics. While US technology mega-caps like NVIDIA, Microsoft, and Meta drove the domestic rebound [6], international markets have seen a more balanced revival. Cyclical sectors such as Energy, Industrials, and Financials have outperformed, reflecting renewed confidence in global economic resilience [3]. Canada, for instance, has emerged as a standout performer, with its energy sector benefiting from both commodity price trends and favorable currency movements [5].

Defensive sectors like Health Care and Utilities, which had been favored during earlier periods of uncertainty, underperformed in Q2—a sign that investors are now prioritizing growth and cyclical exposure over risk mitigation [5]. This shift aligns with the broader trend of portfolio managers upgrading Energy to overweight and downgrading Consumer Discretionary and Financials to underweight [3]. The global AI supply chain, which spans Europe, Asia-Pacific, and emerging markets, has further amplified the appeal of international equities, as investors seek to capitalize on the next phase of technological innovation [4].

Looking Ahead: Volatility and Valuation Arbitrage

The road ahead remains fraught with volatility, particularly for US high-growth stocks, which remain significantly more expensive than their value counterparts. Analysts warn of potential de-rating in these segments, which could erode returns relative to the more attractively valued international markets [3]. However, the global economy’s underlying strength—bolstered by improved corporate earnings and a more stable trade policy environment—provides a counterbalance to these risks.

The Federal Reserve’s anticipated rate cuts in the second half of 2025 will further tilt the playing field in favor of international equities. A weaker dollar is likely to persist, enhancing the returns of non-US assets for dollar-based investors [4]. This dynamic, coupled with the structural undervaluation of international markets, suggests that the current rotation is not a temporary anomaly but a strategic repositioning with long-term implications.

Conclusion

The Q2 2025 market rotation underscores a fundamental shift in investor priorities. As the US dollar weakens and global valuations diverge, international growth stocks have become a critical component of a well-diversified portfolio. While the path forward is not without risks, the combination of attractive pricing, cyclical momentum, and the global nature of innovation offers a compelling case for repositioning. For those willing to look beyond the familiar, the world’s equity markets hold both promise and profit.

Source:
[1] Barometer: Analyzing Q2 portfolio trends [https://www.federatedhermes.com/us/insights/article/barometeranalyzing-q2-portfolio-trends.do]
[2] Q2 2025 Investment review; Steady Hands Prevail [https://privatebank.jpmorgan.com/latam/en/insights/markets-and-investing/q2-2025-investment-review-steady-hands-prevail]
[3] Equity Market Outlook 2Q 2025 [https://www.nb.com/en/global/equity-market-outlook/equity-market-outlook-2q2025]
[4] Q2 2025 Market Outlook [https://linscombwealth.com/q2-2025-market-outlook/]