Earlier this year, some analysts predicted that 2025 could mark a turning point for European stocks, with the potential for outperformance against their U.S. counterparts. At the time, this view was met with skepticism. European markets had struggled for over a decade, underperforming the U.S. due to structural challenges such as fragmented capital markets and inflexible labor systems. But current trends suggest the tide may be turning.
1. A Foundation for Growth: Easing on All Fronts
What makes this year different is a combination of supportive monetary, fiscal, and regulatory policies. This “cocktail” of easing measures is setting the stage for an environment conducive to growth and investment. While Europe does face long-standing challenges, history shows they haven’t prevented companies from delivering strong profitability.
For example, in the period between the dotcom crash and the global financial crisis, companies in the MSCI EMU index (which represents the eurozone) posted annual earnings growth of 29%, more than double the 13% growth seen in the S&P 500. Contrary to popular belief, Europe has shown the capacity for robust corporate earnings in the past.
2. The Tech Argument — and Why It Misses the Point
One common criticism is that Europe lacks global tech giants comparable to those in the U.S., especially in artificial intelligence and innovation. While it’s true that the U.S. leads in originating cutting-edge technologies, European firms are well-positioned to be major users and beneficiaries of these innovations. In fact, if European firms were not adopting these technologies, the lofty valuations of U.S. tech firms would be harder to justify.
3. The Euro’s Strength — A False Concern
A stronger euro is often cited as a headwind for European exporters. However, history contradicts this assumption. In the post-dotcom, pre-2008 period, the MSCI EMU outperformed the S&P 500 by 5.2 percentage points annually in local currency terms — and this during a time when the euro appreciated by roughly 40% against the U.S. dollar. When adjusted for currency effects, European equities delivered nearly 10 percentage points of annual outperformance for euro-based investors.
Moreover, Europe’s economic recovery today appears to be domestically driven. Household consumption is rising as interest rates decline, while banks — now well-capitalized — are better positioned to support credit expansion and profitability.
4. Valuation Gap Signals Opportunity
One of the strongest cases for investing in European stocks now is valuation. Despite recent gains, European equities are still attractively priced. The MSCI EMU index trades at just 14 times forward earnings, compared to 22 times for the S&P 500 — even though earnings are projected to grow 8% and 12%, respectively. Every sector in the EMU still trades at a notable discount to its U.S. counterpart.
This suggests that investors have not yet priced in the sustainability and breadth of the earnings recovery in Europe. The discount remains a reflection of a “lost decade” that continues to influence perception — not necessarily current fundamentals.
5. Conclusion: The Window is Still Open
Investor sentiment is shifting. While some may worry they’ve missed the rally, the data indicates otherwise. The fundamentals, historical precedent, and current policy environment all point to the possibility of continued outperformance for European equities. The undervaluation and the potential for investor reappraisal make now a compelling time to consider exposure to Europe’s stock markets.
