If you’ve been fixated on the news flow around tariffs and stuck on the old narrative that Europe is doomed and can only regulate vs innovate then you might have missed the fact that European equities are up over +10% YTD.
Change is in the air, a key set of breakouts and improving technicals serve as a timely prompt to consider whether there’s more to this —and more left in the move…
What’s driving the strength in European Equities:
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Valuations: unlike expensive US stocks, European stocks are still cheap/reasonably priced, and trade at a record low valuation discount vs US. The thing I always emphasize is that when valuations reach such extremes they have a habit of speaking for themselves; the rubber band eventually snaps back.
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Monetary Policy: the European Central Bank began rate cuts earlier (June 2024) than the Fed, and cut by a larger amount (from 4.5% to 2.9%); a tailwind for the economy and markets.
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Geopolitics: odds are the Russia/Ukraine conflict is going to be put on hold soon, and hopefully an enduring and constructive peace deal can be reached. This will remove war related costs, decrease uncertainty, take tail-risks of wider spillover off the table +maybe even help Europe’s economy through rebuilding.
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Politics: Germany is looking likely to see a shift in government from left to right in its upcoming elections (echoing the global trend as the pendulum swings), this will likely see a more growth/business-friendly regime, with the prospect of infrastructure investment, lower energy costs, and tax cuts. This positive shift will boost sentiment and if pro-growth policies eventuate will be good for the rest of Europe as its largest economy accelerates.
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Reforms: there is at least the intention to improve competitiveness e.g. the Draghi report (400 page report on how to boost innovation and competitiveness; there is a strong likelihood at least some of the ideas get implemented), and moves toward greater focus on shareholder returns.
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China: as I have noted, China’s economy is starting to turn up from recession and prolonged property market downturn, helped by incremental steps up in stimulus — this will be a boost for Europe’s luxury goods companies, and wider export demand (particularly if US tariffs prompt more trading between non-US countries).
As you can probably gather, some of these are somewhat short-term or already in the price e.g. monetary policy easing and (geo)politics, but most of them are more medium/longer-term (enduring). So in other words, I would say it looks like the rally and breakout in European equities is a sign of more things to come.
Basically, it’s time to discard the old narratives and biases on European equities as a new bull market gets underway
Key point: European equities are breaking out and have ample room to run.
Bonus Chart - Further Perspective
In CPI adjusted terms the EURO STOXX 50 looks less impressive, albeit arguably also looks better in terms of potential upside as there remains a large distance to the historical all-time inflation-adjusted highs. The breakout in real terms also looks very compelling.
Similarly, relative to the S&P 500 it's been in a 24-year relative-bear-market. There have been numerous false dawns along that path, but the recent bounce after a failed breakdown to new lows looks promising, especially after the period of relative stalemate over the past couple of years.
I remain convinced that we are set to see an imminent turnaround in global vs US stocks, and this here is a key part of that story.
