Why value investing has worked better outside the US

Dan Lefkovitz, Morningstar Indexes

I recently interviewed investor and author Daniel Rasmussen for The Long View podcast, where he commented that “value hasn’t worked in the U.S., but it’s worked fine internationally.”

I was intrigued by this observation. So, I looked at Morningstar’s indexes. Sure enough, value investing has prospered beyond American shores—this year, as well as over the past three-, five-, and 10-year periods.

US stocks of all styles have beaten international stocks for years, due to a strengthening dollar, superior returns on invested capital, and expanding price multiples.

Morningstar’s US growth index is dominated by the “ Magnificent Seven.” But internationally, the scale is far smaller. There is not a single public company outside the US currently worth $1 trillion.

There was a time when the “ Granolas “ stocks were being promoted as Europe’s answer to the Magnificent Seven (names like GSK, Roche, Nestle, L’Oreal and AstraZeneca). But don’t blame yourself if you haven’t heard of the Granolas. They never really rivaled the Magnificent Seven from a performance perspective.

So, what has boosted value investing internationally? Largely, the financial-services sector (which was lifted by higher interest rates) and energy stocks.

While value has outperformed growth in Europe over the past five years, Europe now represents less than half of equity market capitalization outside the US.

Rather, value stocks in emerging markets (like China, India, and Brazil) and developed Asia have outperformed by an even larger margin than in Europe.

The decline of Chinese internet companies helps explain why value investing has triumphed over growth investing in emerging markets in recent years.

On the developed-markets side, Japan has seen rising interest rates and improved economic and investment conditions disproportionately benefit financial-services stocks, which tend to reside on the value side of the market.

While I have mentioned some macroeconomic factors above, I am generally skeptical of attempts to explain style leadership from the top down. Back in 2022, when sticky inflation prompted the largest interest-rate hikes in a generation, US growth stocks fell much further than value. A popular narrative arose: Growth stocks are more sensitive to interest rates.

But then growth bounced back in 2023 despite high rates. The Magnificent Seven and others rode a wave of enthusiasm for AI. Growth stocks’ thriving amid higher rates is hardly unprecedented. Between 2015 and 2018, the US Federal Reserve hiked rates several times, yet growth beat value by a wide margin.

Ultimately, I agree with Rasmussen that the triumph of growth over value in the US has more to do with “historically unique and rare circumstances.”

I’ve been following markets long enough to know that style leadership can be cyclical. Right now, it’s value investing that’s being fundamentally questioned.

Value stocks have been called “structurally challenged,” in “secular decline,” and “value traps.” But the value side of the market has always been home to troubled companies. Value investing is about stocks that under promise and overdeliver.

Perhaps the long-term cycle will turn again in value’s favor. AI could be revolutionary, but, like the internet, ahead of itself from an investment perspective. We could look back at 2025 as a historical inflection point, as marking a new market regime.

The problem is that these things are only clear in retrospect. It will take time to know if the rotations we’ve seen in early 2025 will last, or if they’re just head fakes.