2025: Are International Equities and U.S. Value Stocks Back?
In a surprising 2025 market shift, international equities have outperformed U.S. stocks by 11%, while U.S. growth lags and value gains. Europe benefits from fiscal stimulus and stability, and U.S. value sectors like healthcare present strong opportunities.
Key takeaways
Market Rotation and Performance in 2025: Contrary to expectations, international equities have outperformed U.S. equities by 11% in 2025, while U.S. growth stocks have declined by 10% and U.S. value stocks have risen by 2%. This shift highlights a significant market rotation across geography and style, with value stocks gaining favor over growth stocks.
European Market Dynamics: European equities are benefiting from a combination of fiscal stimulus, improved economic data from China, and potential geopolitical stability. Germany's recent election has led to expanded fiscal stimulus, including a $546 billion infrastructure fund and increased defense spending. These factors, along with better cohesion across Europe post-Brexit, are providing tailwinds for European equities.
Opportunities in U.S. Value Equities: Within the U.S. market, value equities, particularly in defensive sectors like healthcare, are performing well. The narrowing earnings gap and the sector's attractive characteristics, such as innovation and the growth of aging populations, are driving this performance. Active management strategies are seen as advantageous in navigating the volatile market environment.
2025: Are International Equities and U.S. Value Stocks Back?
Coming into 2025, many market participants were expecting a continuation of the themes which carried the market for the past several years. The consensus was U.S. exceptionalism was set to continue, with U.S. equities having outperformed non-U.S. equities in 13 of the 17 calendar years since the Great Financial Crisis in 2008₁. Similarly, coming into the year growth stocks were largely favored over value, as excitement around AI had helped the Russell 1000 Growth Index outperform the Russell 1000 Value Index by 25% annualized over the last two calendar years₂. However, fast forward to today and things have not played out as expected in 2025, with international equities outperforming their U.S. peers by 11%, while U.S. growth stocks are down 10%, compared to U.S. value peers up 2%₃. We took a closer look at the ongoing market rotation across geography and style, seeking to understand the drivers and where our active managers are finding potential opportunities.
The starting point for this 2025 race is crucial. Looking geographically, Europe trades at a significantly lower p/e valuation to the US market₄, even after their fast start to the year, as can be seen in the chart below. For years, European equity markets have endured political and economic overhangs, including slow economic growth, alongside the drag from exposure to Chinese growth (which knocked 3.5-4% off European earnings in 2024)₅. Geopolitical conflict has been a headwind for European equities as well, with elevated energy prices impacting both the consumer and industrial production.
In 2025 we have started to see some of these clouds lift, but even despite the strongest quarter for the MSCI EAFE benchmark in relation to U.S. equities since 2002₇, just 7% of the flows which left the market in the past two years has returned₈. This would suggest there is further room for inflows to provide a tailwind. The backdrop has shifted after Germany’s election in February yielded a coalition government that has expanded fiscal stimulus including the recent passage of legislation that will create a $546B infrastructure fund; as well as eased borrowing rules to allow higher defense spending₉. The messaging from Germany is also very supportive for the European defense industry, with European defense stocks up 35% YTD₁₀. Indeed, the pledge from Germany to increase fiscal spending echoes other European countries with the UK government committing to an extension of the country’s defense budget₁₁.This development has the potential to provide a tailwind to companies with exposure to defense spending, as well as domestic companies benefitting from broader fiscal spend including areas such as construction and engineering.
China’s focus on boosting consumption has returned and a pickup in consumer activity there can support both Chinese companies and those in Europe which derive revenue from China. Cohesion across Europe is a positive step after the fragmentation witnessed in the wake of Brexit. The confluence of fiscal stimulus, better economic data from China and potential peace in Ukraine are removing several overhangs for European equities.
The tailwinds for Europe are also evident in the micro data. In Q4 2024, the most recent earnings season, sales beats in Europe were at a record high and broadly upgrades to numbers for 2025 have been positive₁₂. This compares with the US where downgrades relative to upgrades are nearly double the long-term average heading into Q1 earnings for 2025₁₃.
Turning our attention to the U.S., while a broad swath of international equities has performed well YTD, finding opportunities within U.S. equity markets has been more challenging₁₄. Thus far in 2025, the market has rotated from a momentum led-rally to a market where value is performing well₁₅.
In fact, U.S. large cap value equities are the only major U.S. index with positive returns YTD through 3/31/25₁₆.We believe one of the key reasons why the market rotation has broadened to include value equities is the narrowing of the earnings gap, as can be seen in the chart below.
Within value equities our investors are finding opportunities in defensive sectors such as healthcare. Healthcare is a sector that is considered “defensive” yet has several attractive characteristics, such as the secular growth of ageing populations around the world, extensive innovation as can be seen with the GLP-1 weight loss drugs, and attractive valuations. Amidst the fast-moving political environment, particularly new trade policies, value equities could have an additional tailwind from their tendency to derive a greater share of their revenue from the U.S.₁₇
Market volatility can be unwelcome, but the sharp reversal in markets to start the year is a good reminder that diversification remains important₁₈. Within international equity markets, active strategies can help investors access non-U.S. companies, leaving the decision as to which countries and companies to allocate towards in the hands of the portfolio managers.
1 US equities as measured by S&P 500 performance; International equities as measured by MSCI EAFE Index performance. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
2 Morningstar as of 3/31/25
3 Morningstar as of 3/31/25. US Equities measured as S&P 500. International Equities measured by MSCI EAFE Index. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
4 LSEG Datastream, MSCI and BlackRock Investment Institute, 03/27/2025. Regions based on MSCI Indexes.
5 BlackRock with data from MSCI based on the MSCI Europe index, January 2025.
6 Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
7 MSCI EAFE vs. S&P 500. MSCI EAFE outperformed by 11.14% in Q1 2025. Source: Morningstar
8 EPFR, Bloomberg, Barclays Research as of 03/26/2025
9 Reuters, 3/21/25, “German borrowing bonanza clears final hurdle”
10 STOXX Europe TMI Aerospace & Defense Index as of 3/31/25
11 GOV.UK press release on 02/25/2025. “Prime Minister sets out biggest sustained increase in defence spending since the Cold War, protecting British people in new era for national security”
12 BlackRock Investment Institute, 02/21/2025
13 Bloomberg as of 3/5/2025
14 Source: Morningstar. US equities measured as S&P 500, International equities measured as MSCI EAFE Index.
15 S&P 500 Factor Indices Dashboard as of 12/31/2024 and 3/31/2025.
16 Source: Morningstar. Includes S&P 500, Russell 1000 Value, Russell 1000 Growth, Nasdaq, Russell Mid-Cap and Russell 2000 Indices.
17 Morningstar as of 3/31/25. Looked at % of revenue derived from U.S. for Russell 1000 Value & Growth, S&P 500 and Nasdaq indices.
18 Diversification does not assure a profit and may not protect against loss of principal. Diversification among investment options and asset classes may help to reduce overall volatility.
19 The Fund is actively managed and does not seek to replicate the performance of a specified index. The Fund may have a higher portfolio turnover than funds that seek to replicate the performance of an index. Convertible securities are subject to the market and issuer risks that apply to the underlying common stock. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. There is no guarantee that dividends will be paid. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and then the general securities market. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
20 The Fund is actively managed and does not seek to replicate the performance of a specified index. The Fund may have a higher portfolio turnover than funds that seek to replicate the performance of an index. Convertible securities are subject to the market and issuer risks that apply to the underlying common stock.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. There is no guarantee that dividends will be paid. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries.
Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
21 The Fund is actively managed and does not seek to replicate the performance of a specified index. The Fund may have a higher portfolio turnover than funds that seek to replicate the performance of an index. Convertible securities are subject to the market and issuer risks that apply to the underlying common stock.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.