Global markets have been swept up in a wave of risk-taking, fuelled by three key factors in the US: slowing inflation, strong economic growth, and expectations surrounding policy.
At the core of this optimism is the belief that the Trump administration’s deregulation and tax cuts will stimulate further growth. While the US remains the primary focus, European markets have recently shown signs of a revival.
After more than 15 years of under-performance relative to the US, a trend that has accelerated under the new administration, European stocks are finally gaining some traction.
The STOXX 50 index of blue-chip European companies surged 8% in January 2025, outperforming the S&P 500 by over 5%. European companies, like Heineken, have posted strong earnings, initiated share buybacks, and are forecasting further growth, boosting investor confidence.
This renewed optimism in European equities has been reinforced by recent comments from BlackRock CEO Larry Fink, in addition to growing speculation that the Eurozone economy may be turning a corner.
Although it remains uncertain whether this shift will evolve into a sustained trend, the recent momentum suggests a potential turning point in European markets.
Europe’s undemanding valuations have long been a point of attraction, but what is different now is that uncertainty is at elevated levels. European stocks generally trade at lower Price-to-Earnings (P/E) ratios compared to US stocks, offering investors the opportunity to buy companies at relatively lower prices.
This valuation advantage becomes more appealing in uncertain times. For example, the EURO STOXX 50 trades at a forward P/E ratio of 15.7 and a Shiller P/E of 17, compared to 21.4 and 37 for the S&P 500.
On a sector-neutral basis, European stocks trade near record-low multiples relative to US equities. Moreover, Eurozone long-term earnings growth expectations are over 8.5 percentage points below those of the US, one of the widest gaps on record. This degree of pessimism creates a large margin of safety for European stocks, particularly valuable in such an uncertain environment.
Despite Europe’s sluggish economy and the threat of trade tariffs from President Trump, there has been a noticeable shift in investor sentiment. Disappointing US tech earnings, alongside the rise of competitors, like China’s DeepSeek, have made other markets more attractive.
Europe’s sector composition also plays a role, with a greater focus on value sectors like financials, industrials, and energy, which traditionally trade at lower multiples compared to the growth-heavy US market.
Should interest rates remain higher in Europe, sectors like financials and industrials can benefit, making the market more appealing.
The Ukraine war could become a key turning point for European stocks. With the US withdrawing support for Ukraine, Kyiv may be forced into negotiations, significantly raising the chances of a ceasefire in 2025. An end to the war would likely reduce regional risk premiums, boosting investor confidence and fuelling economic reforms across Europe.
At the same time, US President Donald Trump’s influence may drive a regulatory shift in Europe.
European policymakers, under pressure, could be forced to tackle excessive regulations, which former European Central Bank President Mario Draghi has long cited as a hindrance to competitiveness. The European Commission president, Ursula von der Leyen, has also called for easing the EU’s ESG agenda, seeking to reduce regulatory burdens on businesses.
Meanwhile, France’s new government has been drafting proposals to limit the EU’s Corporate Sustainability rules, signalling a broader push toward deregulation and economic flexibility.
If these trends materialise, geopolitical stability and regulatory reform could provide a long-term boost to European markets, reinforcing their recent resurgence.
Financial conditions are increasingly favourable for European stocks, driven by several key developments. The Euro has dropped 7% against the US dollar in the past four months, reaching its lowest level since the fourth quarter of 2022.
However, unlike last year, European natural gas prices are significantly lower, around €50/MWh, compared to €100/MWh to €200/MWh previously. Moreover, German bund yields have fallen by over 120 basis points relative to US Treasuries since April 2023, further easing financial conditions in Europe.
These changes have helped boost European growth and earnings compared to the US, and analysts have noted a shift in sentiment. According to Bank of America Merrill Lynch, there has already been one of the largest month-over-month allocations to European equities on record.
While it is unclear whether this marks the start of a true European comeback or simply a rotation in investor preferences, European stocks are clearly benefiting from looser financial conditions, positioning the region for potential outperformance in 2025.
China’s economic stabilisation in 2025 is also contributing significantly to European equities’ optimism. Q4 GDP growth in China surged to 5.4% year-over-year, signalling a recovery.
As China’s economy stabilises, its demand for European goods and services is expected to rise, benefiting European exporters in sectors such as automobiles, machinery, luxury goods, and technology.
Furthermore, as China is a major consumer of commodities, its recovery helps stabilise global commodity prices, providing positive momentum for European companies in the energy, mining, and materials sectors.
China’s economic recovery could benefit European tourism, particularly with the return of Chinese tourists to popular European destinations, boosting revenues for companies in hospitality, luxury retail, and transportation.
Additionally, if China increases its stimulus efforts, it would further enhance the appeal of European companies.
Stronger monetary dynamics in China often correlate with outperformance of European equities, given the region’s high dependence on the Chinese business cycle. This economic synergy adds to the optimism for European growth in 2025.
In times of heightened uncertainty, Europe’s undemanding valuations become a major draw for investors.
Coupled with easing financial conditions, a stabilising Chinese economy, the growing likelihood of a Ukraine ceasefire, and European leaders’ efforts to loosen regulatory constraints, the region is presenting an increasingly favourable environment for investment. This convergence of factors provides the green shoots of recovery that global investors have been seeking, making Europe a region worth considering for potential gains in 2025.
As Europe moves toward more supportive conditions for growth, European equities could present a promising opportunity amidst improving geopolitical and economic stability.
Richard Maparura is Senior Portfolio Manager, Asset Management, Butterfield.
Sources: Bloomberg Economics
Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken based on this information.
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