Value Vantage Point: Time to go international for value

Time to break out the passport. After years when US investors were content to stay almost exclusively within their home market, recent gyrations in US tech stocks, growing US policy uncertainty, and a revival in both Europe and Japan, where value companies tend to be more prevalent, have made overseas markets more alluring. As we see it, international stocks’ appealing valuations, rebounding economic activity and a greater focus on shareholder returns warrant more US investor attention. 

Value overseas: The fundamental case

While US equities have far outperformed their international counterparts over the past five years, we are starting to see international equities make up some ground in early 2025. And international value stocks have performed well compared to US value stocks. (See Exhibit 1.)

We expect this strength to continue as European economic growth begins to pick up and Japanese inflation and growth returns; we believe the appealing relative valuations between non-US and US value stocks are too attractive for US investors to ignore. (See Exhibit 2)

A return to economic dynamism: The macro case

Signs that US exceptionalism may be ending could further narrow the valuation gap. Tariff uncertainty, for one, is creating more volatile and less predictable financial markets. And a weakening US dollar has historically signaled better non-US stock market performance. (See Exhibit 3.)

Meanwhile, Europe and Japan are boosting their own economies. Germany’s recently approved infrastructure and defense spending, both outside of existing debt limits, may force other European countries to follow suit. Faster economic growth in Germany, Europe’s largest economy, would be positive for the region overall even if other countries do not spend as much in the coming years. (See Exhibit 4.)

We believe Europe still has plenty of work to do to improve its economic growth rate and boost competitiveness. Former European Central Bank (ECB) Chief Mario Draghi’s 2024 report on regional competitiveness calls for more spending on infrastructure, defense, electrification and research and development. If enacted, we believe the job creation and industrial production that follows could benefit the region economically over time. (See Exhibit 5.)

As European spending increases, value industries, from cement and asphalt firms to rail and rail equipment companies, as well as power equipment, construction and commercial vehicle companies, could all benefit.

Monetary stimulus may further boost growth. With inflation near the ECB’s 2% target, the central bank has room to cut interest rates, thereby loosening financial conditions and providing added economic benefits.

The Japanese economic story has also been improving. After years of deflation and anemic growth, recent wage increases and resulting inflationary pressures are reviving the moribund economy and sparking a new period of economic dynamism.

Overall inflation has been climbing in recent months as higher wages give consumers more spending power, pushing prices higher. (See Exhibit 6.) Coupled with growing tourism, we should see domestic Japanese companies benefit over the medium term.

Meanwhile, better economic activity outside the United States and still strong US growth can bolster earnings at domestically focused European and Japanese companies and multinationals alike. According to FactSet estimates, MSCI EAFE earnings per share are forecast to grow over 9% in each of the next three years, with MSCI USA Index earnings growing in the low double digits. (See Exhibit 7.)

Corporations act: The business case

Beyond the improving earnings outlook, both Europe and Japan have begun to focus more on improving shareholder returns, either through ongoing dividends or increasing share buybacks. Stock buybacks which have been strong in the United States are now an increasing part of how both European and Japanese companies return cash to shareholders. (See Exhibit 8.) In Europe and Japan, these increased share buybacks come alongside an already healthy dividend yield. (See Exhibit 9.)