European Equities via ADRs: A Strategic Reassessment Amid Dollar Weakness and Capital Reallocation

The global capital landscape in 2025 has witnessed a seismic shift, with European equities traded in the U.S. as American Depositary Receipts (ADRs) outperforming their American counterparts. This trend, driven by a confluence of valuation arbitrage, fiscal stimulus, and dollar depreciation, has redefined the strategic calculus for investors. According to a report by Refinitiv, the MSCI Europe Index surged 20% year-to-date through September 2025, while the MSCI USA Index eked out a meager 2.7% gain Europe's Value Revolution: Billions Flow from Overpriced US Equities to Undervalued European Bargains^[2]. This divergence reflects a broader reallocation of capital, as European equity funds attracted €150 billion in Q1 2025 alone, with an additional €22 billion flowing in during April and May Europe's Value Revolution: Billions Flow from Overpriced US Equities to Undervalued European Bargains^[2].

Valuation Arbitrage and Sectoral Strength

European stocks have emerged as compelling value plays amid U.S. market overvaluation. The Stoxx 600 trades at a forward price-to-earnings (P/E) ratio of 14x, compared to the S&P 500's 22x Europe's Value Revolution: Billions Flow from Overpriced US Equities to Undervalued European Bargains^[2]. This gap, the widest in a decade, has drawn investors seeking undervalued exposure. Sectors like defense, automation, and green energy have led the charge. German defense contractor Rheinmetall AG, for instance, has surged on rearmament spending, while Thyssenkrupp AG benefits from EU infrastructure stimulus packages Why European stocks are outperforming the US - Goldman Sachs^[4].

Goldman Sachs analysts note that European corporate earnings have also outpaced expectations, bolstered by a ceasefire in Ukraine and pent-up demand in energy transition projects Why European stocks are outperforming the US - Goldman Sachs^[4]. A backtest from 2022 to the present shows that European ADRs with earnings beats consistently outperformed the MSCI World Index, reinforcing the strategy's effectiveness during this period[^backtest>.

Meanwhile, U.S. growth stocks, particularly in tech, face headwinds as investors rotate into sectors with clearer cash-flow visibility Europe's Value Revolution: Billions Flow from Overpriced US Equities to Undervalued European Bargains^[2].

Dollar Depreciation and Capital Flows

The U.S. dollar's historic depreciation—down over 10% against key currencies and 13% against the euro since early 2025—has amplified the appeal of European ADRs Europe's Value Revolution: Billions Flow from Overpriced US Equities to Undervalued European Bargains^[2]. A weaker dollar makes European stocks cheaper for U.S. investors while enhancing returns when converted back to dollars. JPMorgan Asset Management attributes this trend to slower U.S. growth, rising deficits, and policy uncertainty, rather than interest rate differentials Where is the U.S. dollar headed in 2025? | J.P. Morgan^[3].

Non-U.S. ETFs investing in U.S. equities have seen outflows, while European-focused ETFs received a record $42 billion in net flows by July 2025 Where is the U.S. dollar headed in 2025? | J.P. Morgan^[3]. This shift underscores a global rebalancing, as investors diversify away from dollar-centric portfolios. The Bank of America Fund Manager Survey further highlights this trend, with 39% of managers overweight in European equities—the highest since mid-2021 Europe's Value Revolution: Billions Flow from Overpriced US Equities to Undervalued European Bargains^[2].

Currency-Adjusted Returns and Strategic Implications

While specific currency-adjusted return metrics for European ADRs remain elusive, the interplay of stock performance and exchange rate dynamics suggests robust gains. A weaker euro (or stronger dollar) would amplify ADR returns for U.S. investors, though European firms with U.S. revenue streams face margin compression from currency conversion Are ADRs Subject to Currency Risk? - Accounting Insights^[1]. For example, a 10% euro appreciation could reduce earnings for the STOXX 600 by ~2% Where is the U.S. dollar headed in 2025? | J.P. Morgan^[3].

Despite these risks, the strategic value of European ADRs lies in their dual exposure to earnings growth and currency tailwinds. BlackRock analysts argue that European stocks offer “similar sectoral exposures at half the valuation” of U.S. equities Europe's Value Revolution: Billions Flow from Overpriced US Equities to Undervalued European Bargains^[2]. This makes them particularly attractive in a world where U.S. exceptionalism is waning.

Risks and Outlook

Challenges persist, including U.S. tariff threats and geopolitical volatility. European real estate markets, for instance, face supply chain disruptions from new U.S. steel tariffs Spotlight: European Investment – Q1 2025^[5]. However, Goldman Sachs projects European equities could rise another 6% in the next 12 months, driven by fiscal stimulus and earnings momentum Why European stocks are outperforming the US - Goldman Sachs^[4].

For investors, the key is balancing exposure to European ADRs with hedging strategies to mitigate currency risk. Defensive sectors like healthcare and utilities, which benefit from aging populations and stable cash flows, offer additional resilience Europe's Value Revolution: Billions Flow from Overpriced US Equities to Undervalued European Bargains^[2].

Conclusion

European ADRs have transitioned from niche investments to strategic assets in 2025. Their outperformance reflects a recalibration of global capital flows, valuation discipline, and policy-driven growth. While risks remain, the current environment—marked by dollar weakness and European fiscal ambition—positions ADRs as a compelling vehicle for diversification and long-term value creation.