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2025 Q2 Portfolio Perspectives1

by | Jul 17, 2025

It’s Time in the Sun?

Since the global financial crisis (“GFC”), there has been a sharp divergence in the performance between U.S. and International equities, with the U.S. market having topped international markets in 12 out of the past 15 calendar years. Technology-related themes encompassing mobile, e-commerce, cloud computing, and, more recently, artificial intelligence have propelled the U.S. market and its technology-related constituents to new heights while creating trillion-dollar companies along the way. It has fueled the growth of passive investing (ETFs) at the expense of active management in a manner that has been unprecedented. In conjunction, these factors created an almost virtuous cycle which attracted further inflows from around the world and resulted in the U.S. weight within the MSCI World Index climbing from sub 50% to north of 70%. The euphoria surrounding the U.S. market even lured management teams of a few past international equity holdings to relist in the U.S. with the hopes of garnering a higher valuation multiple. Interestingly, the last time the U.S. market approached this weighting in the Index was in the early 1970s, only to see it give way to another market mania- the Japanese asset bubble2. As we close the chapter on the first half of 2025, U.S. stocks are off to the worst start against global peers in more than 30 years.

There are several factors that have led the market to change course:

  • A U-turn in investor expectations – entering 2025, investors were bullish on President Trump’s return to the White House. Under his first term, the S&P 500 climbed nearly 70% and investors were hoping for more of the same this time around. Instead, the President’s erratic policies towards trade combined with growing deficit concerns appear to have replaced optimism with uncertainty. Investors have been increasingly looking to a region like Europe in search of alternatives. For years, Europe endured political and economic overhangs. Today, its prospects have brightened thanks to massive fiscal stimulus measures coming out of Germany, a more accommodative European Central Bank, and its largest trading partner, China, exhibiting some economic green shoots.
  • Old industries are new again – the U.S. market is more heavily weighted toward technology companies, while international indices have higher weightings in industrials, materials, financials, and energy. These latter groups are expected to benefit from global macro trends like infrastructure rebuilding, rising defense spending, the energy transition, and reindustrialization. Suddenly, “old economy” stocks are perhaps no longer so boring, whether it is a Germany-based BASF, which is a key supplier of materials and solutions for infrastructure development and renewable energy solutions, or professional power tool providers Makita and Techtronic Industries, whose equipment will be found at the ground level of these trends.
  • Safe haven woes – Since President Trump embarked on his second term, the dollar has lost more than 10% of its value against the Euro, Pound, and Swiss Franc and is down against major currencies in the world. For years, strong U.S. equity returns were enhanced by a rising U.S. dollar. But today, with trade-related uncertainties, ballooning fiscal debt, and weakening confidence about enduring U.S. exceptionalism, the U.S. dollar has come under pressure.
  • A growing valuation disparity – coming out of the GFC, the average U.S. company traded at a little over 15x normalized earnings, yet today it is north of 30x. While the U.S. equity market possesses many high-quality businesses that earn ROEs above that of the average international company, investors seemed to have gotten carried away with the premium valuations they were willing to pay for these businesses relative to their international peers. International markets also offer unique businesses of similar quality to what can be found in the U.S. whether it is Taiwan Semiconductor Manufacturing Company (TSMC), which sits at the heart of the growing proliferation of computer chips or recently initiated diversified financial Macquarie Group, one of the pioneers of the infrastructure asset management model. Perhaps now a reversion to the mean is beginning to take hold.

Despite weathering one of the longest stretches of outperformance by the U.S. market, we have consistently argued that international equities provide a broad opportunity set of public companies to choose from while offering diversification benefits in terms of country, sector, and currency exposures. We remain focused on investing in a universe of high-quality companies that trade at attractive relative valuations.

[1] Source: Sprucegrove, MSCI, FactSet, as of 6/30/2025
[2] During the Japanese asset price bubble of the late 1980s, Japan reached a peak weight of 44% in the MSCI World Index.
Companies mentioned are current or historic holdings

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