Which equity styles are performing well? The answer may surprise you
By Duncan Lamont, Head of Strategic Research at Schroders
Most people think of the current bull market as a “Growth” stock rally, backed by the US Magnificent-7. But that is only true in the US. The opposite is true internationally, where performance, sector make-up, and valuations are very different. The “Value” style has been flying.
This may come as a surprise because, when you look at the performance of global markets, what you are really looking at is the performance of the US, given its 75% weight. What happens in the other 25% barely registers. Incorrectly extrapolating US performance to the rest of the world means opportunities are likely to have been missed. However, there are concrete actions you can take today to respond and position for the future.
Turning the performance tables
In EAFE (Europe, Australasia, and the Far East, a stock market index designed to represent global developed markets excluding North America), Value returned 20% in USD terms in the 12 months to 31 August 2025, outperforming the market by 6% and “Growth” stocks by 13%. Growth stocks themselves lagged the market by 6%. This is the reverse of the US experience that we read about all the time. Stateside, Value has underperformed Growth by 17% and the market by 8% in the past year. The scale of these recent performance swings in EAFE are so great that they now also feed into more medium-term numbers. Over three- and five-year horizons, Value is well ahead of Growth and the market. European and UK Value stocks (MSCI EMU Value and MSCI UK Value) are not only ahead of their Growth equivalents, they’re also ahead of the S&P 500 over the past five years (in both common currency and local currency terms).
Another segment that has struggled in the US but performed much better outside is High Dividend stocks. Past performance might not be a guide to the future, but things are clearly different outside the US. One area of commonality has been the recent terrible performance of “Quality” stocks (those with more stable operating performance, better return on equity, lower leverage, etc.). These have outperformed over the long run in both the US and EAFE, but have had a torrid 12 months. Quality has underperformed the market by 12% in EAFE and 7% in the US. In EAFE, this has been so punitive that Quality is also now well behind on a three- and five-year basis.
Chart : It’s been a Value and High Dividend market in EAFE. Growth and Quality have languished
Performance vs MSCI EAFE in USD, % p.a. other than YTD which is %
Chart : Whereas in the US, Growth has been clear top dog
Performance vs MSCI USA, % p.a. other than YTD which is %
What have been the drivers of performance?
In the US, Growth companies have been rewarded for their better earnings growth (driven by technology companies). Outside it they have not. EAFE Growth companies have underperformed despite having superior earnings growth. Rising valuations have been in the driving seat for Value and High Dividend styles. They’ve done very well despite weak earnings. This is partly a reversal of the valuation extremes that existed previously (see later section), and which still exist in the US. Arguably, downgrades to the outlook for Quality earnings over the past 12 months are consistent with poorer relative performance. An appeal of Quality stocks is the robustness of their businesses, so any weakness on that front is unlikely to go down well.
A word on sector allocations
When investors think of Growth companies they think of technology (IT). And this is true in the US, where over half the sector by market capitalisation is IT. In addition, Amazon and Tesla are in consumer discretionary, and Alphabet is in communication services. IT + Amazon + Alphabet + Tesla = 70% (perversely, Meta is not a member of the MSCI USA Growth index, it is the largest stock on the MSCI USA Value index).
But, as with performance, it is wrong to extrapolate the US to the rest of the world. IT is only 14% of Growth in EAFE, whose allocation is much more diverse. The biggest sector is Industrials, on 27%, while the healthcare weighting is also triple the US equivalent. The perception of growth stocks being a play on AI/technology simply doesn’t translate that well outside of the US. The same is true of Quality, where IT has a much bigger weight in the US. Value is one area where there are greater similarities, with financials being the biggest sector both within and outside the US.
Valuation extremes between styles have largely unwound in EAFE
A few years ago, Growth and Quality stocks both traded on expensive valuations in EAFE when compared with history, while Value and High Dividend stocks were cheap. However, the recent swings in performance mean that these divergences have all reduced substantially.
- Quality trades at a slight discount to historical valuations. This is true for trailing and forward price/earnings multiples. It is also the opposite of the situation in the US, where it trades at a significant premium.
- Value and High Dividend stocks had fallen to very cheap levels but, because share price growth has significantly outperformed earnings growth, that is no longer the case.
- Growth still looks expensive vs history in EAFE, but the degree of expensiveness is nothing like in the US.
- Growth has been cheapening vs Value in EAFE and is currently the cheapest vs Value for around six years. Growth stocks are still relatively expensive vs Value on a longer-term historical basis.
- This cheapening of Growth vs Value has also happened in the US, despite Growth’s outperformance there. This has happened because US Growth company earnings have been so much stronger than those of Value.
What does this mean for investors?
Outside the US, valuations have converged on more neutral levels across the styles. Quality is no longer expensive, Growth is no longer as expensive, Value and High Dividend stocks are no longer cheap. Everything is much more reasonable, in isolation and relative to each other.
This is in stark contrast to the US, where valuations are far more stretched in absolute terms and relative to each other, when compared with history.
How should investors respond? Valuations are not the only factor to consider, although they do matter a lot in the long run. With many of the recent extremes in EAFE now unwound, it calls for investors with a longer-term outlook to consider a more neutral, balanced, style allocation. This doesn’t mean one particular style can’t go on a run, or another a period of tough performance, but there is less of a valuation case to expect that. And, in a world where uncertainties abound, diversifying by styles should increase your chance of earning resilient portfolio returns.
Another important point is that many stocks, styles and countries in the global stock market are performing well. Many are outperforming the US. But, if you’re passively tracking the global stock market, as increasing numbers of investors are, you have hardly any exposure to them in your portfolio. At the end of August, the US was nearly three quarters of the global market. The Magnificant-7 make up more than Japan, UK, China, Canada, France, Germany and Switzerland combined. That means those seven stocks have a bigger weight than the next seven biggest countries combined. Global portfolios are loaded up on US mega-cap growth-style risk and have hardly any exposure to the wider opportunity set. The fact that many other parts of the market are performing differently, and better, than the US, amounts to barely a rounding error in many investors’ returns.
The case for unshackling yourself from the benchmark with a more active approach to investing has never been greater.
Further reading