International Value Stocks Outperform U.S. Large-Cap Benchmarks: A Case for Rebalancing Global Portfolios

The global equity landscape in 2025 has witnessed a striking shift in momentum, with international value stocks outperforming U.S. large-cap benchmarks by a historically significant margin. By mid-2025, the MSCI World Ex-U.S. Index had surged 15% year-to-date, outpacing the MSCI U.S. Index by its largest calendar-year gap since 1993 [2]. This divergence reflects broader structural changes in global economic dynamics, valuation arbitrage, and sector-specific momentum that warrant a strategic rebalancing of global portfolios.

Valuation Divergence: A Catalyst for Outperformance

The underperformance of U.S. large-cap stocks, particularly growth-oriented names, has been exacerbated by stretched valuations. As of Q2 2025, U.S. high-growth stocks traded at multiples 57% higher than their value counterparts, a disparity that has historically corrected during periods of earnings underperformance [2]. Meanwhile, international value stocks, concentrated in regions like Europe and Asia, offered more attractive valuations. The MSCI EAFE Index, for instance, traded at a forward P/E of 14.7 compared to the S&P 500’s 22.1 [1], creating a compelling case for capital reallocation.

This valuation gap is further amplified by macroeconomic factors. European and Asian markets, with their stronger ties to the global goods cycle, have benefited from stimulus-driven recoveries. The European Central Bank’s rate cuts and China’s industrial policy initiatives have spurred demand for cyclical equities, which are more prevalent in international value indices [2].

Sector Momentum: Industrials and Financials Lead the Charge

Within international value stocks, specific sectors have emerged as key drivers of outperformance. European industrials, for example, surged on a EUR 500 billion fiscal stimulus package in Germany focused on infrastructure and defense spending [3]. Similarly, European financials gained traction as the ECB’s accommodative policy reduced borrowing costs and boosted earnings visibility [2]. Small-cap stocks in emerging markets also rebounded, with the MSCI Europe Small Cap Index rising 11.7% year-to-date, outperforming broader European benchmarks [1].

In contrast, U.S. large-cap value stocks lagged, with the Russell 1000 Value Index returning just 3.79% in Q2 2025, compared to 17.84% for the Russell 1000 Growth Index [5]. This underperformance was concentrated in sectors like energy, which declined 8.56% amid shifting commodity dynamics [4].

Rebalancing Strategies: Capitalizing on Momentum

Investors seeking to align with these trends should consider increasing exposure to international value sectors with strong macroeconomic tailwinds. For instance, defense and industrial stocks in Europe, which benefit from geopolitical tensions and fiscal expansion, offer both earnings resilience and valuation appeal [3]. Similarly, emerging market financials, supported by policy easing and currency depreciation, present opportunities for capital appreciation [5].

Conversely, reducing overweight positions in U.S. growth stocks—particularly those in artificial intelligence and communication services—may mitigate downside risk as earnings expectations normalize. The S&P 500’s reliance on a narrow group of mega-cap tech stocks, which accounted for 23.71% of its gains in Q2 2025 [4], highlights the concentration risk in U.S. large-cap benchmarks.

Conclusion

The outperformance of international value stocks in 2025 underscores a fundamental realignment of global capital flows. As valuations diverge and sector momentum shifts toward cyclical and policy-sensitive equities, rebalancing portfolios to overweight international value—particularly in industrials, financials, and small-cap segments—offers a compelling path to capturing long-term growth. Investors who act decisively on these trends may position themselves to capitalize on the next phase of the global equity cycle.

**Source:[1] Q2 2025 Equity Market Observations - Intech Investments [https://www.intechinvestments.com/q2-2025-equity-market-observations/][2] Equity Market Outlook 2Q 2025 [https://www.nb.com/en/global/equity-market-outlook/equity-market-outlook-2q2025][3] European equities – Rising stars [https://www.robeco.com/en-int/insights/2025/05/european-equities-rising-stars][4] Q2 2025 Quarterly Market Review [https://www.td.com/us/en/investing/learning-and-insights/quarterly-market-review-q2-2025][5] Q2 2025 Quarterly Market Review [https://www.td.com/us/en/investing/learning-and-insights/quarterly-market-review-q2-2025]