The Little-Noticed Outperformance of International Value Stocks

From 2009 through 2024, the dominant investment narrative was one of U.S. exceptionalism. The S&P 500 consistently outpaced international equities, and U.S. growth stocks trounced their value counterparts. Most investors are well aware of this long-running trend—and many have noticed the dramatic shift in 2025, as international stocks have surged ahead. What remains underappreciated, however, is that international value stocks have not only outperformed the S&P 500 year-to-date, but have also quietly beaten it over the past five years.

The Numbers: International Value’s Quiet Triumph

According to Morningstar, as of May 22, 2025, the DFA International Value I (DFIVX) fund has returned 17.97% year-to-date, compared to a modest -0.17% for Vanguard’s S&P 500 ETF (VOO). That’s an astonishing 18.14% outperformance in just five months.

Even more surprising, DFIVX has also delivered superior returns over the past five years—18.47% annualized versus 16.33% for VOO, a 2.14 percentage point annual advantage. The story is similar for the DFA International Small Cap Value I (DISVX), which has returned 20.67% year-to-date and 17.07% annualized over five years, both figures outpacing the S&P 500.

2025: A Turning Point

The investment landscape has changed dramatically in 2025. Uncertainty around U.S. trade and tax policy has dampened consumer and business confidence, raising recession risks and challenging the narrative of U.S. economic superiority. The U.S. dollar, for example, fell to 99.05 by late May—a reflection of mounting concerns over tariffs, geopolitical tensions, and threats to Federal Reserve independence. This decline has sparked talk of “de-dollarization,” as central banks diversify away from the dollar in favor of gold and other currencies.

A weaker dollar has several implications: it stokes inflation, raises capital costs for U.S. firms, and makes U.S. equities less attractive to foreign investors. Meanwhile, Europe is taking bold steps to stimulate its economies. Germany has announced a €1 trillion fiscal package focused on infrastructure and defense, while the EU is relaxing fiscal rules and considering new funding sources, such as repurposing COVID-19 recovery funds and liquidating frozen Russian assets.

Lessons from Market Cycles

History shows that leadership between U.S. and international markets is cyclical. The U.S. outperformance streak since 2009 has been extraordinary, but previous cycles have always reverted—especially when driven by widening valuation gaps. Mean reversion in valuations has often led to prolonged periods of U.S. underperformance, as seen in Japan after 1989 and in the U.S. following the dot-com bubble.

Currency movements play a crucial role. A strong dollar has suppressed international returns for U.S. investors, but a weakening dollar could provide a powerful tailwind for global equities.

Key Takeaways for Investors

A New Cycle May Be Underway: The era of U.S. equity dominance may be giving way to a period of international leadership, especially in Europe and among value stocks.

Valuations and Policy Shifts Matter: Wide valuation gaps, policy changes, and currency dynamics are aligning to support a rotation in market leadership.

Capital Flows Are Changing: The U.S. trade deficit is mirrored by a capital account surplus, as countries like China and Japan recycle dollars into Treasuries. If they sell less to Americans, they have fewer dollars to invest in U.S. assets—a trend that could accelerate if they choose to diversify further.

Rebalancing Is Prudent: Investors should consider rebalancing portfolios to capture potential upside in attractively valued international equities, particularly in small-cap and value segments.

Avoiding Recency Bias

With over 30 years of experience as an advisor, I’ve seen how recency bias leads investors to extrapolate recent trends indefinitely. It’s easy to forget that U.S. equities underperformed international markets during the 2000s, 1980s, and 1970s. The U.S. outperformance since 2008 has been unusually persistent, driven by rising relative valuations and a pronounced growth edge. However, history and valuation analysis suggest that mean reversion is far more likely than a continuation of this trend—especially after a decade of extraordinary U.S. gains.

In summary: The quiet outperformance of international value stocks is a reminder that markets are cyclical, and leadership eventually changes hands. The dramatic shift in performance we have seen in the first five months of 2025 is also a reminder that when regimes shift, the shifts can be both rapid and dramatic, like a rubber band snapping back.