European stocks' 2025 outperformance is over, but don't forget the euro
The broad European STOXX 600 index was up 6.6% so far this year, as of Friday's close, compared with 6.8% for the S&P 500. (.STOXX), opens new tab, (.SPX), opens new tab
In March the STOXX was 10 percentage points ahead, leading European bulls to think this might be their time after years of European markets underperforming Wall Street.
Calls for European outperformance still ring true in currencies, however, with the euro up 14% against the dollar year to date.
Trade talks and the new U.S. tax-cut and spending law are tests for the rotation out of the U.S. and into Europe, said UBS Asset Management's head of global sovereign markets strategy Max Castelli.
"I don't think U.S. exceptionalism will come back with the same strength and intensity," he said. "But I would not rule out the big period of outperformance of European assets over the U.S. being over."
Here's a look at how Europe's performance against the U.S. stacks up.
Marija Veitmane, head of equity research at State Street Global Markets, said Wall Street shares started bouncing back in mid-April, partly because the "trade war became trade negotiations."
But the "real turning point" was corporate earnings season when "tech CEOs stood up and said 'Our earnings are going to be very strong'."
Tech (.SPLRCT), opens new tab accounts for roughly one-third of the S&P 500, (.SPX), opens new tab and the sector is up 24% since the start of April, even including its plunge when U.S. President Donald Trump announced his tariff plans.
Nvidia, once again the world's largest company by market cap, has risen an even more dramatic 45%, and there isn't anything in Europe to match. (NVDA.O), opens new tab
But by no means all investors are rushing back to Wall Street with the S&P 500 at record highs, suggesting valuations are getting stretched.
"The tariff announcement showed how fast sentiment can change and how risky these high (U.S.) valuations are," said Madeleine Ronner, senior equity portfolio manager at asset manager DWS, adding that European valuations are more reasonable.
And while that gap had been appropriate because of slow corporate earnings growth, "Europe's (earnings per share) is starting to grow again, and the differential is getting smaller, which should be reflected in valuations," she said.
DWS sees U.S. and European GDP growth being roughly similar in 2025 and 2026, a further and sustainable boost to European companies' earnings.
Investors have snapped up European stocks, but that has centred largely on the same sectors -- defence (.SXPARO), opens new tab, up 50% this year, and banks (.SX7P), opens new tab up 28%, suggesting a lack of faith in the broader market.
The two account for more than 50% of the return of the STOXX 600, despite making up just 16% of the index, BNP Paribas Exane estimates.
That's not surprising as NATO members have agreed to increase defence spending, and massively in the case of Germany. But valuations are stretched.
Germany's Rheinmetall (RHMG.DE), opens new tab trades on a forward price to earnings ratio of more than 50; even Apple (AAPL.O), opens new tab and Microsoft (MSFT.O), opens new tab are only around 30.
The picture is clearer in currencies, where the euro is at a near four-year high and closing in on $1.20.
At the start of the year many analysts predicted the euro would fall below one dollar, thanks to what was then seen as an insatiable demand for U.S. assets.
But when this reversed, the euro began to appreciate, a move that grew as foreign holders of U.S. stock and bonds, fearing further dollar weakness, increased their currency hedges.
Now the euro is expected to keep gaining even if outflows from the U.S. stop.
"Foreigners don't need to sell U.S. assets to weaken the dollar but merely to say 'No thank you' to buying more," Deutsche Bank's head of FX strategy George Saravelos said in a note.
That currency move also affects equity investors, making European stocks cheaper for U.S. investors and Wall Street more expensive from Europe.
The S&P 500 may be at a record high for domestic investors, but priced in euros it's 9% off its February top.
"For euro-based investors the currency ate up so much U.S. assets' returns this year," said DWS' Ronner. "If there's another letdown, in euros that gets even worse."
On the other hand, the STOXX 600 in local currency terms is still shy of March's record, but priced in dollars it hit an all-time high in late June.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The Independent
32 minutes ago
- The Independent
Bank of England could cut base rate if jobs market continues to slow
The Bank of England could make cuts to interest rates if the jobs market slows down, Andrew Bailey has said. Businesses are 'adjusting employment' as a result of Chancellor Rachel Reeves' decision to raise national insurance contributions (NICs) for employers, the governor of the Bank also told The Times. Companies are 'also having pay rises that are possibly less than they would have been if the NICs change hadn't happened', Mr Bailey said. In an interview with the newspaper, the governor said the British economy was growing behind its potential. This could open up 'slack' to bring down inflation, he said, meaning prices on goods would rise less swiftly compared with earnings in future. Mr Bailey said he believes the base rate set by the Bank of England would be lowered in future, after it was held in June. The current Bank rate of 4.25%, which has a bearing on all lending in the UK – including mortgages – will be reviewed again on August 7 by the Bank's Monetary Policy Committee. 'I really do believe the path is downward,' Mr Bailey told The Times. He added: 'But we continue to use the words 'gradual and careful' because… some people say to me 'why are you cutting when inflation's above target?'' The governor's indication that lower lending rates and reduced inflation could be around the corner comes as the Government is facing pressure to improve living standards. Ms Reeves' tax and spend plans are also being constrained by the current borrowing costs, as well as downgraded growth forecasts. The Chancellor's fiscal headroom has been in part eroded by U-turns on the winter fuel payment and welfare reforms, as well as global shocks to the British economy. Some in the Labour Party, including former leader Lord Neil Kinnock and Wales's First Minister Baroness Eluned Morgan, are calling for a wealth tax to help bolster the public finances. On Sunday, Transport Secretary Heidi Alexander said such a tax had not been 'directly' discussed when ministers held an away day at the end of last week. But speaking to Sky News' Sunday Morning With Trevor Phillips programme, she would not rule out tax rises at the autumn budget, only saying tax decisions would be made based on 'fairness'.
BBC News
an hour ago
- BBC News
Who profited most from Club World Cup $1bn prize pot?
The Club World Cup has had its critics but for the clubs involved the competition's $1bn prize pot has proved a lucrative the first edition of the new-look tournament now complete, we are able to analyse the financial rewards reaped by those competing Sport explains the breakdown of the prize money and what it means for the clubs getting it. How much money was on offer? The new look competition had a prize pot of $1bn (£726m) to give out to the 32 competing clubs, with $525m divided between all clubs for participation and $475m awarded on a performance-related awarded for participation for European clubs was weighted by a ranking based on sporting and commercial criteria, meaning some were awarded more than others for taking part. European clubs were handed between $12.81m and $38.19m just for turning up, while teams from other continents were given a set fee - that was $15.21m for South America, $9.55m for North and Central America, and Asia and Africa, and $3.58m for has not confirmed the individual amounts given to European clubs for taking part, so we have used estimates from football finance website The Swiss Ramble based on Uefa's club coefficient system. The prize money figures have been converted from US dollars into pound sterling. The big winners Tournament winners Chelsea were by far the most financially successful team, earning about £84m, while Paris St-Germain made about £78.4m in their run to the clubs, who generally enjoyed larger participation fees, made an average of around £39m while impressive runs from the likes of semi-finalists Fluminense meant that South American clubs made £24m on was on offer for results in the group stage, with around £1.5m for a win and £730k for a clubs, including Pachuca and Seattle Sounders, lost all three group games meaning they only received their participation fee. Auckland City hit the jackpot Despite prize money figures for the likes of part-time side Auckland City looking small, the competition has been incredibly lucrative for them within the context of their overall finances. The £3.3m taken home by Auckland City was around seven times their overall 2024 revenue of approximately £488,000, while the £67m made by Real Madrid was just 4% of their 2024 figure of £ this is a huge positive for the part-time club, football finance expert Kieran Maguire has concerns for the impact on other sides from New said: "They have earned so much money that it's difficult to see anybody being able to compete with them if they invest in the playing squad."And there's a huge incentive for them to do that because it enhances the chances of them qualifying for the next Club World Cup."It's good for them, but it's not necessarily good for the league when you're trying to sell a competitive league to broadcasters." Extra transfer funds For the European clubs, the extra revenue has been welcomed as a way of increasing their transfer line with Uefa rules, clubs are limited to spending 70% of their revenue on wages, transfers and agents' fees - so for every £50m earned, an extra £35m is available for clubs have already paid off their summer transfer business by taking part in the competition. More than 65% of Borussia Dortmund's £57.9m transfer business so far this summer has been paid off from their participation in the United States after they reached the quarter-final £27m Dortmund paid to Sunderland for Jobe Bellingham has already been completely paid have spent £198m on reinforcements so far this summer on the likes of Joao Pedro and Liam Delap - £84m of that has been covered by their impressive run at the Club World Manchester City's surprise last-16 exit to Al-Hilal, they still earned around £38m from the tournament - which equates to 35% of the summer business they have conducted so more simple terms, it has paid for their £31m acquisition of Rayan Ait-Nouri from Madrid paid Liverpool a fee of around £8.4m for Trent Alexander-Arnold to get him a month early to be part of their squad for the competition - that was paid off after just three matches."It's welcome for the accountants at football clubs. The business will be happy," said finance expert Maguire about the competition's lucrative incentives."But I'm not sure fans will be happy, particularly of European clubs, and it'll be the same for players and managers."We're reaching a crisis point as far as player welfare is concerned. We could be entering a period of conflict between players and owners."
Reuters
an hour ago
- Reuters
Siemens and SAP call for EU to revise its AI regulations
ZURICH, July 13 (Reuters) - Siemens ( opens new tab and SAP ( opens new tab CEOs have urged the European Union to revise its artificial intelligence legislation, saying the current rules stifle innovation. SAP CEO Christian Klein and Siemens CEO Roland Busch told the Frankfurter Allgemeine Zeitung that a new regulatory framework is needed to support rather than hinder technological advancement. The EU's AI Act, which became law last year, governs the development and use of AI systems to ensure they are safe, transparent and respect fundamental rights. The law classifies AI applications into risk categories, according to which providers must meet certain security and transparency requirements. But Siemens' Busch said the Act was a key reason Europe is lagging, adding overlapping and sometimes contradictory regulations are hampering progress. He said the EU's Data Act, another law which sets out obligations on how companies use consumer and corporate data, was "toxic" for developing digital business models. While several companies including Google owner Alphabet (GOOGL.O), opens new tab and Facebook owner Meta (META.O), opens new tabrecently, opens new tab wrote to Brussels asking for the rules to be postponed, Busch declined to sign their letter, saying the proposal did not go far enough. SAP's Klein warned against simply copying the U.S. and only investing heavily in infrastructure and data centres, emphasizing that infrastructure shortages are not the main barrier in Europe. Instead, both CEOs called for reforming data rules before investing in data centres. "We are sitting on a treasure trove of data in Europe, but we are not yet able to tap into it," Busch told the newspaper. "It's not access to computing capacity that we're currently lacking, but the release of resources."
