Reallocating Equity Exposure: The Case for International Markets in 2025 Amid U.S. Valuation Imbalances and Macroeconomic Divergence

The U.S. equity market, long a cornerstone of global investing, is facing a critical inflection point in 2025. While its historical dominance persists, a confluence of valuation imbalances and macroeconomic divergence with international markets is creating a compelling case for strategic reallocation. Investors who fail to rebalance their portfolios risk overexposure to an increasingly expensive domestic market, while underleveraging opportunities in undervalued global equities.

Valuation Imbalances: A Stark Divide

The U.S. , 2025-a level significantly above its historical average and far outpacing international peers, according to siblisresearch's CAPE data. For context, , , . These figures underscore a valuation gap that has widened over the past year, with U.S. equities trading at a premium to nearly all major global markets.

Price-to-book (P/B) ratios reinforce this trend. Customers Bancorp (CUBI), a U.S. financial services firm, , within its historical range but modest compared to the broader market's elevated multiples, according to a report. Meanwhile, European equities, as highlighted by Neuberger Berman's Q3 outlook, remain historically undervalued, trading about two standard deviations below U.S. markets-nearly the largest relative discount in five decades. This divergence suggests international markets, particularly in Europe, offer more attractive entry points for long-term investors.

Macroeconomic Divergence: Rates, Growth, and Inflation

The U.S. and international markets are diverging not just in valuation but in macroeconomic fundamentals. , , , according to a Visual Capitalist map. These lower rates in non-U.S. markets enhance the appeal of international equities, as companies benefit from cheaper financing and higher profit margins.

GDP growth projections further highlight this divergence. The U.S. , per the , , according to the IMF regional outlook. Meanwhile, inflation in the U.S. , as noted by the Philadelphia Fed SPF and the IMF regional outlook, compounding concerns about structural inflationary pressures in sectors like healthcare, analysis.

Strategic Reallocation Opportunities

The case for reallocating equity exposure is strongest in sectors and regions where valuations and macroeconomic conditions align. European equities, for instance, offer a compelling mix of undervaluation and improving fundamentals. As the U.S. dollar weakens-a trend that began in February 2025-returns for international equities have been amplified, with global markets outperforming U.S. , per Enterprise Bank's playbook.

Emerging markets (EMs) also present opportunities, having outperformed U.S. , as noted in the Enterprise Bank playbook. While EMs carry higher volatility, their lower valuations and improving trade dynamics make them attractive for diversified portfolios. Similarly, Asian markets, despite slower growth projections, benefit from controlled inflation and accommodative monetary policies, creating a favorable environment for equity investors.

Conclusion

The U.S. equity market's premium valuations and macroeconomic headwinds-ranging from sector-specific inflation to a tightening monetary policy-contrast sharply with the more attractive fundamentals of international markets. For investors seeking to balance risk and reward, reallocating exposure to undervalued global equities is not just prudent but necessary. As the Fed contemplates rate cuts by year-end (per the Visual Capitalist map) and international markets continue to trade at historic discounts, the window for strategic entry is narrowing.