Europe-bashing has become fashionable for commentators in the last few years, but the economy may be showing signs of potential amid the Trump onslaught. Preconceptions about Europe’s stock market could also be changing.
27 March 2025
Forget the Zelensky ambush in the Oval Office on 27 February, just over a month previously Europe had already received its very own humiliation at the hands of its presumed allies. At a panel during the World Economic Forum in Davos, Larry Fink, head of global asset management behemoth Blackrock, provocatively stated that “Europe is a myth. It’s a beautiful myth, but it’s not working”. European Central Bank (ECB) president Christine Lagarde was forced abruptly onto the defensive, replying testily that “Europe is not a myth, Europe is not a basket case.”
The International Monetary Fund (IMF) would probably disagree, predicting economic growth of just 1% in 2025 while Bloomberg’s latest regular survey of economists reveals a similar prediction of growth of 0.9% for the bloc.1 Europe’s economic travails have been well picked over for many years now and Mario Draghi’s September 2024 policy paper ‘The future of European competitiveness’ summarises them neatly in one single and very damning volume. But for the benefit of the uninitiated the list includes, inter alia: fragmented capital markets, excessive bureaucracy, demographic headwinds, high energy prices and weakness in emerging technologies.
Unsurprisingly then, Europe’s stock markets have been similarly lacklustre. In the decade to end 2024, the S&P 500 index has returned a spellbinding 242% (or 13.1% annualised) versus the MSCI Europe’s 101% (or 7.2% annualised).2 But the wind of change could be in the air, with Europe’s stock market quietly outperforming America’s since last summer. In the minds of some analysts, this has been propelled, ironically, by the new US president who has chastised Europe for not paying for its own defence, openly considered the withdrawal of US troops from the continent and recently applied a 25% tariff on European steel and aluminium while threatening the automotive, semiconductor and pharmaceutical sectors with the same and the wine and champagne industry with a 200% duty. While it is clear that Europe will probably have to do much more to control its own destiny in the future, there have been fundamental developments at the economic and market level which are making Europe more appealing to investors.
MEGA outperforms MAGA:
Chart 1: MSCI Europe versus S&P 500 performance from 28 June 2024 to 19 March 2025
Source: Bloomberg, GAM, as at 19 March 2025. Past performance is not an indicator of future performance and current or future trends.
At the economic level, things may be looking up. The latest German purchasing managers’ index (the S&P Global / BME Germany Manufacturing PMI) is showing an improvement from an admittedly low level which some have interpreted as suggesting that the eurozone’s largest economy could be exiting its manufacturing recession soon. Encouragingly, the European Union (EU) is looking at measures for slimming down January’s new bank capital rules after central banks in Germany, France, Italy and Spain complained they were too onerous.
One area of improvement would be for banks to re-deploy more of their assets outside their balance sheets, allowing for the improved issuance of securities Europe so badly needs. M&A in the finance sector could also be made smoother by the European authorities while outside finance, sectors such as electric vehicles and semiconductors are set to receive more direct help. Brussels for example recently approved EUR 920 million of German subsidies for chipmaker Infineon to build a new semiconductor plant. But perhaps the most exciting jolt to the European economy will likely come from Germany’s incoming government. Chancellor-in-waiting Friedrich Merz appears to have pulled off a constitutional revolution which will allow Germany to spend on infrastructure and defence to the tune of EUR 500 billion on the former while lifting the 1% of GDP cap for the latter.
Crucially, EU officials are committed to ensuring Europe’s own defence complex and economy receives more of this increased defence spending not just from Germany but from across the bloc. Europe’s defence firms supplied just 22% of the continent’s military kit in 2022 and 2023, but there is now a far more ambitious target of 50% by 2030 in place under the European Defence Industrial Strategy (EDIS). History shows that economic revivals often begin with rearmament and there are precedents such as in Europe after the Second World War to meet the new communist threat and in the US during the Reagan administration when spending on defence rose in order to conclude the Cold War.
For European stocks the obvious beneficiary in recent weeks has been the defence sector but a sustainable European equity turnaround will need to be more broad-based. The good news is that Germany’s stock market in particular has been defying stereotypes and assumptions for a good few months now. As measured by the DAX index, Germany’s largest firms have outperformed the S&P 500 since the end of 2023. Given the narrative that Germany’s economy is being threatened by high energy prices and Chinese competition, it is perhaps unsurprising that the leaders of this stock market revival are less ‘cars and chemicals’ (which now account for just circa 10% of the DAX) and more service and consumer companies.
Banks both in Germany and across Europe have also seen an upturn from a combination of factors including an end to negative interest rates as well as the aforementioned reforms the EU is carefully looking at. Europe’s larger investment banks continue to trade at below book value, suggesting the rally, in the financial sector at least, has further to go. Valuation is also helpful in building a picture of an enduring European market recovery.
The MSCI Europe index trades at just under 15x forward earnings versus just over 21x forward earnings for the S&P 500 as of 19 March 2025. On this measure alone, Europe enjoys a near-30% discount versus the US. The two regions’ earnings yields versus their corresponding government bond yields are also instructive. The difference between the two is known as the Equity Risk Premium (ERP) and reveals what equity holders can expect to be paid in excess of bondholders. The MSCI Europe index enjoys a healthy forward earnings yield of 6.7% compared with Europe’s risk-free rate of 2.8% for the German 10-year bund yield as of 19 March this year, giving a 3.9% ERP. This compares very favourably over the US, where the S&P 500 index offers a forward earnings yield barely 0.5% points more than the US 10-year Treasury’s 4.3%.3
Europe’s ERP bigger than the US’s:
Chart 2: Equity Risk Premium (% points) from 31 December 2019 to 19 March 2025
Source: Bloomberg, GAM, as at 19 March 2025. Equity Risk Premium here is defined as the forward earnings yield of the given equity index minus the 10-year yield of the corresponding government bond, expressed in % points. Past performance is not an indicator of future performance and current or future trends.
It is probably too early to talk about an outright European Renaissance. The continent’s challenges have not evaporated in the course of a couple of months. The population continues to age, Brussels is likely to be the global capital of regulation for some time to come and Europe continues to lack a technology sector that can come anywhere close to Silicon Valley. And obstacles to serious reform abound. Lifting Germany’s debt brake (schuldenbremse) when it is hallowed national policy still requires a final vote and faces potential legal challenges including from the far-right Alternative for Germany.
Furthermore, Germany and the rest of the EU still operate under the Stability and Growth Pact which would need to be reformed to allow for greater fiscal flexibility across the bloc. EU treaties however are notoriously hard to unravel in the short to medium term. It is therefore no mystery that the Bloomberg economist survey, which predicted 0.9% growth for the eurozone for 20254, has shown no sign of improvement despite the positive changes described in this article. In other words, Europe is going to need serious bloc-wide reform over time to move the growth dial for a largely sceptical investment community.
With that said, the tone has definitely improved. A visible and enduring mindset shift among Europe’s policymakers could be just enough to see ongoing improved performance in Europe’s markets as well as provide real hope for more flexible economic policies into the future. The unpredictability Stateside, see the S&P 500’s recent correction, has of course been a catalyst in Europe’s recent reassessment. While few investors would seriously suggest outright betting against the US and all it fundamentally offers, the Old Continent does appear to offer an intriguing window of opportunity that could be pursued without rejecting Uncle Sam.
Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments. This article represents the views of GAM’s Multi-Asset team.
1Source: Bloomberg, the International Monetary Fund, as at January 2025.
2Source: Bloomberg, as at 31 December 2024.
3Source: Bloomberg, as at 19 March 2025.
4Source: Bloomberg, as at 16 March 2025.
2Source: Bloomberg, as at 31 December 2024.
3Source: Bloomberg, as at 19 March 2025.
4Source: Bloomberg, as at 16 March 2025.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not repre¬sent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The Standard and Poor's 500, or simply the S&P 500, is a stock index tracking the performance of 500 of the largest, publicly traded companies in the United States. The MSCI Europe Index captures large and mid-cap representation across 15 Developed Markets (DM) countries in Europe. With 414 constituents (as at 28 February 2025), the index covers approximately 85% of the free float-adjusted market capitalisation across the European Developed Markets equity universe. A Purchasing Managers' Index (PMI) is a key economic indicator derived from monthly surveys of private sector companies that gauges the health and direction of the manufacturing and service sectors. The S&P Global Germany Manufacturing PMI® is compiled by S&P Global from responses to questionnaires sent to purchasing managers in a panel of around 420 manufacturers. The panel is stratified by detailed sector and company workforce size, based on contributions to GDP. Data collection began in April 1996. Survey responses are collected in the second half of each month and indicate the direction of change compared to the previous month. A diffusion index is calculated for each survey variable. The index is the sum of the percentage of ‘higher’ responses and half the percentage of ‘unchanged’ responses. The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease. The indices are then seasonally adjusted. The headline figure is the Purchasing Managers’ Index® (PMI). The PMI is a weighted average of the following five indices: New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%) and Stocks of Purchases (10%). For the PMI calculation the Suppliers’ Delivery Times Index is inverted so that it moves in a comparable direction to the other indices. The DAX is a stock market index consisting of the 40 major German blue-chip companies trading on the Frankfurt Stock Exchange. It is a total return index. Prices are taken from the Xetra trading venue. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
This article contains forward-looking statements relating to the objectives, opportunities, and the future performance of the equity markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
This disclosure shall in no way constitute a waiver or limitation of any rights a person may have under such laws and/or regulations.
In the United Kingdom, this material has been issued and approved by GAM London Ltd, 8 Finsbury Circus, London EC2M 7GB, authorised and regulated by the Financial Conduct Authority.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not repre¬sent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The Standard and Poor's 500, or simply the S&P 500, is a stock index tracking the performance of 500 of the largest, publicly traded companies in the United States. The MSCI Europe Index captures large and mid-cap representation across 15 Developed Markets (DM) countries in Europe. With 414 constituents (as at 28 February 2025), the index covers approximately 85% of the free float-adjusted market capitalisation across the European Developed Markets equity universe. A Purchasing Managers' Index (PMI) is a key economic indicator derived from monthly surveys of private sector companies that gauges the health and direction of the manufacturing and service sectors. The S&P Global Germany Manufacturing PMI® is compiled by S&P Global from responses to questionnaires sent to purchasing managers in a panel of around 420 manufacturers. The panel is stratified by detailed sector and company workforce size, based on contributions to GDP. Data collection began in April 1996. Survey responses are collected in the second half of each month and indicate the direction of change compared to the previous month. A diffusion index is calculated for each survey variable. The index is the sum of the percentage of ‘higher’ responses and half the percentage of ‘unchanged’ responses. The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease. The indices are then seasonally adjusted. The headline figure is the Purchasing Managers’ Index® (PMI). The PMI is a weighted average of the following five indices: New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%) and Stocks of Purchases (10%). For the PMI calculation the Suppliers’ Delivery Times Index is inverted so that it moves in a comparable direction to the other indices. The DAX is a stock market index consisting of the 40 major German blue-chip companies trading on the Frankfurt Stock Exchange. It is a total return index. Prices are taken from the Xetra trading venue. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
This article contains forward-looking statements relating to the objectives, opportunities, and the future performance of the equity markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
This disclosure shall in no way constitute a waiver or limitation of any rights a person may have under such laws and/or regulations.
In the United Kingdom, this material has been issued and approved by GAM London Ltd, 8 Finsbury Circus, London EC2M 7GB, authorised and regulated by the Financial Conduct Authority.