After years of underperformance compared with their US counterparts, several catalysts are fuelling optimism for European stocks, including relative valuation advantages, fiscal stimulus and resilient earnings growth.
Over the first three months of 2025, European large-cap equities were up 10.4%, outpacing their US peers which had fallen 2.9% over the same period, according to Bloomberg data. This resurgence has been driven by a combination of favourable factors that look set to continue and could narrow the longer-term performance gap with the US.
Relative valuations
European markets have historically traded at a discount to their US counterparts – and, more recently, this gap has widened significantly. As an example, the Euro Stoxx 50 index, which measures the 50 largest Eurozone companies, has a forward price-to-earnings (P/E) ratio of just under 15x expected earnings, according to Bloomberg – a significant discount to the S&P 500’s 21x.
This valuation gap is partly due to Europe’s lower concentration in mega-cap technology companies, and more exposure to traditional industries such as financials, industrials and materials. It is also a reflection of the historically weaker growth prospects in Europe.
Nevertheless, there are reasons to believe this tide may be turning. The deep discount of European equities provides a cushion against downside risks and room for re-rating if economic conditions do improve. This relative cheapness, combined with signs of fading ‘US exceptionalism’, are encouraging a rotation of capital into European markets in 2025.
“The deep discount of European equities provides a cushion against downside risks and room for re-rating if economic conditions do improve.
In contrast, Europe offers a more balanced market structure, attractive valuations across market caps, improving earnings growth and exposure to an improving Chinese economy”
Some of the fund selectors we are in touch with agree that a shift may be occurring for European equities, with Ian Willings, a partner and portfolio manager at Apollo Multi-Manager, saying: “We remain overweight European equities in 2025, reflecting our strong conviction in the region’s relative value, broad earnings recovery, and improving macroeconomic dynamics.
“While US markets have reached new highs led by the so-called ‘Magnificent Seven’, earnings growth outside of these names appears increasingly uncertain – especially with the unpredictability of President Trump’s second term regarding fiscal policy and trade.
“In contrast, Europe offers a more balanced market structure, attractive valuations across market caps, improving earnings growth and exposure to an improving Chinese economy. Structural reforms across key European economies, along with more accommodative monetary conditions, further support our view that Europe is well positioned for sustained outperformance in the period ahead.”
Fiscal stimulus
Fiscal stimulus, particularly from Germany, is emerging as a key catalyst for European equities. After decades of strict fiscal discipline, Germany’s new government is shifting toward expansionary policies in an attempt to boost the stagnant economy.
It is proposing a €500bn (£426bn) infrastructure investment fund and similar defence spending exceeding both the spend on Reunification and the World War II Marshall Plan in relative percentage of GDP. The stimulus is expected to boost euro area GDP growth by an estimated 0.5% to 1% in 2025, benefitting the entire region.
In addition, the emerging prospect of a ceasefire in Ukraine could unlock substantial reconstruction, benefiting the construction, industrial and energy sectors. The European Central Bank has also adopted a more accommodative stance, cutting interest rates multiple times since mid-2024, with further reductions anticipated through mid-2025. Lower borrowing costs, combined with fiscal loosening, could stimulate economic activity and bolster equity markets.
Earnings growth
A return to earnings growth is also supporting European equities. After a long period of stagnation, consensus estimates for European earnings growth are between 8% and 10% over the next 12 months, narrowing the gap with the US’s expected range of 12% to 14%. Sectors where Europe has significant exposure, such as financials, industrials and cyclicals, are poised to benefit from an improving economic backdrop.
Paul Dennis, investment director at Holden Partners, shares the optimism for Europe, noting: “We have been positive on Europe for a while – albeit a tad early relative to the US. 2025 has started well for European equities due to attractive valuations, strong late 2024 earnings with many companies beating expectations, and Trump tariffs likely accelerating the onshoring/nearshoring trend.
“Those with competitive pricing power and market leading products will have a chance to take advantage. Lastly, with ‘defence’ being the talk of the town and Trump playing his protectionist games, assets may shift from the US into Europe’s defence sector.”
And the biggest risk?
Undoubtedly the biggest risk to a continued resurgence in Europe does not come from inside the Eurozone, but from the US. As we are seeing, the imposition of wide-ranging tariffs from the Trump administration is already negatively affecting economic activity globally.
Europe is particularly sensitive to tariffs targeting the automobile sector, which comprises a full 7% of the bloc’s GDP, according to EU Observer. While the potential for any negotiated exemptions could provide a positive catalyst, there remains a high degree of uncertainty surrounding the ultimate scope and impact of the tariff measures.
A number of positive catalysts serve to mark European equities out as an attractive investment. Their undervaluation relative to the US offers a compelling entry point, while fiscal stimulus could re-ignite economic activity.
With a projected increase in earnings growth, European stocks are well-positioned for potential near-term outperformance. Despite risks such as tariffs and geopolitical uncertainty, Europe appears ready to finally step out of the US’s shadow, offering investors a diversified and attractively priced alternative in global equity markets.
Greg Clerkson is Director – Global Asset Management at iM Global Partner.
Style-neutral stockpicking
Since iM Global Partner’s foundation in 2013, providing strong European equity solutions for clients has always been key. We acquired a long-term minority stake in Zadig Asset Management in 2020, attracted by its investment team, focused Darwinian fundamental approach and the quality of its now 14-year track record.
With significant experience in selecting European equity managers, Jean Maunoury, our CIO research & investment, was captivated by the firm’s unique style-neutral approach. He firmly believes neither growth nor value performance drives their returns – stockpicking does.
iM Global Partner is fully aligned with Zadig’s style-neutral philosophy and active approach to stock selection and believes it to be suited to the evolving geo-political environment. “Our approach is disciplined and research intensive,” says Francesco Rustici, a fund manager and partner at Zadig Asset Management.
“We meet management regularly and our models are key for sharing information across the whole investment team. We make sure only our best ideas end up in the portfolio. When selecting companies, we try to exploit what we call the ‘comfort bias’ we believe the market has – in that we do not shy away from anti-consensual or controversial ideas as long as the risk/reward on valuation is good.”
