Is it finally Europe’s moment in the sun? – by Ramsey Crookall

After fifteen years of underperformance compared to US equities, it is understandable that investors might be sceptical about the idea that investing in European equities will be, to use a phrase, different this time. However, there are strong reasons to believe that 2025 could be different.

Sentiment towards Europe has clearly improved this year. In the first five and a half months, European shares are up 21.9% in USD terms, compared to only 4.4% for the S&P 500. Some of this excess return results from the US Dollar’s weakness. Some commentators argue that US market underperformance reflects concerns over President Trump’s unpredictable policies rather than genuine enthusiasm for Europe, but we see the improving economic fundamentals as a more convincing explanation.

Inflation under control

Inflation in Europe is under control, having fallen to the European Central Bank’s 2% target. Consequently, the ECB has continued cutting interest rates this year, with the main rate now at 2.25%, which is 2% lower than the US, where the Federal Reserve remains cautious about rate cuts due to potential inflation from tariffs. This is significant because European savings rates are relatively high, and falling interest rates combined with rising consumer confidence should boost spending.

Defence spending

Europe’s defence spending is increasing; the Ukraine conflict has exposed long-standing underfunding in national defence, leading to political shifts, and Germany has launched a historic fiscal package focused on improving infrastructure and defence, including measures like excluding defence expenditure exceeding 1% of GDP from debt limits and allowing a structural deficit increase. Additionally, €500 billion will be dedicated to infrastructure projects over the next decade.

European growth

Germany’s budget change is expected to boost fiscal growth by 1.6% of GDP, while France’s increase is 0.8%. This could accelerate European GDP growth relative to the US over the next two years, as evidenced by more positive earnings forecasts for Europe and declining forecasts for the US.

Despite European equities almost outperforming US ones this year, valuation differences remain attractive. The forward P/E ratio for the Stoxx Europe 600 is 14.2, versus 20.2 for the S&P 500. European stocks also offer higher income yields (3.2% versus 1.4%), which could become more appealing if growth slows later.

Moreover, European equities provide diversification, with prominent sectors like financials (24%) and industrials (14%), compared to the US, where technology dominates. This sector contrast means European and US markets may perform differently in various scenarios. We’re not advising a wholesale shift from US equities—after all, the US remains the world’s largest market and home to many global leaders. But recent US political developments have caused investors to revisit assumptions, including the resilience of the US dollar.

Conclusion

Although no investment is without risk, and European equities’ success isn’t guaranteed, short-term risks such as renewed trade disputes and reliance on global factors like currency strength are present.

However, the improving economic outlook and attractive valuations suggest an opportunity, particularly since many investors are still underweight Europe compared to the US.

Happy hunting!

Performance figures are as of June 25, 2025.