Global Market Opportunities in Non-U.S. Equities: Valuation-Driven Rotation and Geopolitical Tailwinds in Q2 2025

Valuation-Driven Rotation: A Shift in Global Capital Allocation

In Q2 2025, global investors increasingly reallocated capital toward non-U.S. equities, driven by stark valuation divergences and improving fundamentals. According to a report by PGIM, the MSCI World Ex-U.S. Index outperformed the MSCI U.S. Index by 15% year-to-date, marking its largest calendar-year gap since 1993 . This rotation was underpinned by a widening gap in forward price/earnings (P/E) ratios: U.S. large-cap equities traded at 22x, while non-U.S. equities offered a more attractive 14x . Non-U.S. value stocks, in particular, were highlighted as compelling opportunities, with a P/E of 11x compared to 21x for non-U.S. growth stocks .

The valuation gap reflects a structural shift. U.S. markets, dominated by megacap tech stocks, faced extreme valuation anomalies, while non-U.S. equities demonstrated a more balanced earnings growth profile. For instance, European sectors like Industrials and Technology showed net profit margins exceeding 5-year averages, contrasting with U.S. Energy sector declines .

Regional Focus: Europe and Emerging Markets as Undervalued Hubs

Europe emerged as a standout performer, with the MSCI Europe Index surging 26% in USD terms year-to-date. This was fueled by the European Central Bank's (ECB) rate cuts—two 25-basis-point reductions in April and June 2025—and easing inflation . The STOXX 600, despite a 1.33% Q2 decline, benefited from fiscal stimulus and a weaker U.S. dollar, which amplified returns for U.S.-based investors . Small-cap European equities also gained traction, with the MSCI Europe Small Cap index rising 11.7% year-to-date, driven by lower real yields and domestic demand .

Emerging markets (EM) saw robust gains, with the MSCI Emerging Markets Index rising 12% in Q2. India and Brazil were key drivers: the MSCI India Index gained 9.2%, supported by an unexpected central bank rate cut and domestic policy clarity, while the MSCI Brazil Index surged 13.3% on easing inflation and targeted U.S. tariff adjustments . China, however, lagged due to trade tensions, though semiconductor rebounds in Korea and Taiwan offset some regional underperformance .

Geopolitical Tailwinds: Dollar Depreciation and Trade Policy Shifts

The U.S. dollar's depreciation—down over 10% year-to-date against a basket of major currencies—acted as a tailwind for non-U.S. equities. As noted by SSGA, this depreciation enhanced returns for international assets, particularly in EM, where currency gains amplified equity returns . Additionally, U.S. trade policy shifts, including a pause on new tariffs in April 2025, stabilized investor sentiment. While short-term conflicts like the Iran-Israel tensions in June 2025 introduced volatility, the broader trend of easing trade tensions between the U.S. and China supported risk-on sentiment .

Conclusion: A Case for Strategic Diversification

The Q2 2025 performance of non-U.S. equities underscores the importance of valuation-driven rotation and geopolitical tailwinds in under-owned regions. With European fiscal stimulus, EM policy easing, and a weaker dollar, investors are increasingly positioning for a rebalancing of global portfolios. As T. Rowe Price observed, the valuation spread between U.S. and non-U.S. stocks presents a compelling opportunity for compression, particularly in sectors and regions where fundamentals are improving . For investors seeking diversification and long-term value, non-U.S. equities offer a compelling case in the evolving global landscape.