In the first month of 2025, European equities saw the largest monthly capital inflows in 25 years, according to Bank of America. This surprising development comes after the European STOXX Europe 600 index recorded just 6% growth for 2024 compared to 24% for the US S&P 500 index.
The euro area economy grew by just 0.9% in the third quarter, while the US economy grew by 2.7%. Preliminary data for the fourth quarter will be published this week. Although the eurozone managed to tame inflation to 2.4%, this led to a broad-based economic slowdown.
The outlook for 2025 suggests a growing divergence between US and eurozone monetary policy, partly due to the Trump administration's planned actions. ECB interest rates are already more than 1% lower than in the US and the gap could widen further. Economists expect the ECB to cut rates by up to one percentage point this year, while the US is expected to drop rate by only half a percentage point. This has a negative effect on the EUR/USD exchange rate, which has already reached parity.
Europe still faces many risks such as inflation, an economic slowdown, the risk of a tariff war with the US or China, a collapsing car industry, rising energy prices... the list is long.
So what brings investors back to European markets?
Banks
In the US, banks traditionally kicked off the earnings season in style. Most of them beat expectations thanks to strong interest income and a recovery in trading activity on Wall Street, especially in areas such as trading and investment banking.
But European banks also attracted media attention. UBS estimates that shareholder compensation for 2024 could exceed $123 billion for the second year in a row. After a long period of low or even negative interest rates, the outlook for banks has improved significantly since the COVID-19 pandemic.
European bank shares are reaching all-time highs thanks to high interest yields. And although the ECB has already started to cut interest rates, banks still have the opportunity to take advantage of this situation and maximise profits in 2025 thanks to the economic recovery of consumers.
Despite the positive developments, however, valuations of European banks still lag behind their US counterparts. Many European titles are trading at less than their book value, suggesting room for growth. On the other hand, the deregulation of the US banking sector poses a significant competitive risk for European banks. Less stringent rules may allow US banks to expand more aggressively, which could put pressure on European players in international markets. The luxury sectorWith the start of the Q4 2024 earnings season, we were able to get a glimpse into the performance of several leading European players in the luxury goods sector. Brunello Cucinelli (LON:0Q7S), Richemont (SIX:CFR) and Burberry (LON:BRBY) reported results, while we expect further reports in the coming weeks. What trends did these results reveal?
Richemont
Richemont, known for its luxury jewellery and watches such as Cartier, Piaget and Montblanc, reported double-digit sales growth in all regions except Asia.
In Asia, sales fell 7%, driven by an 18% drop in mainland China. Nevertheless, this is an improvement on the 16-19% year-on-year decline in previous quarters. Asia accounts for up to 40% of Richemont's sales, making it a key region.
Europe recorded a strong growth of 19%, boosted by tourism from the Americas and the Middle East. The Americas grew the most of all regions, driven by strong consumer and economic development. This is a significant acceleration in both regions, as revenue growth in recent quarters was only 5% and 10% respectively.
Brunello Cucinelli
Brunello also reported " enchanting" Q4 results in January.
In the Americas, sales rose 17.8%, underlining strong demand from US consumers. Europe saw slightly more modest growth at 6.6%. In Brunello's case, growth in Asia was surprisingly strong, even after the company raised its expectations to 11-12% growth in December from an initial 10%. Fourth-quarter sales were up 12.6%.
Brunello benefits from a unique position in Asia as it targets ultra-high-net-worth clients that have not been affected by the widespread economic slowdown. Hermes is also in a similar position. Brunello also benefits from the fact that Asia accounts for only ~27% of its sales.
Burberry
Burberry is facing a difficult time given the ongoing efforts to revive the brand. Despite this, sales in the Americas recorded 4% growth. Europe saw a 2% decline, while sales in China unsurprisingly fell the most, down 7%.
However, the results were still better than analysts expected, leading to a massive rally in Burberry shares.
The entire sector rode the wave of optimism from these results, especially the strength in the US and the recovery of European consumers. In the second half of last year, investors lost confidence in some brands given that the uncertain extent of the economic problems in China posed a significant risk to many of them. However, it seems that investors were a little too pessimistic.
Not everything is as rosy as it seems
While the banking and luxury goods sectors in Europe are showing promising developments, other European favourites face significant challenges. The earnings season in Europe may be off to a slower start than in the US, but there are already early signs of risks that could affect 2025.
For example, ASML (AS:ASML) shares recently weakened after Dutch Prime Minister Dick Schoof hinted at the possibility of renewing strict export bans on AI chips at a forum in Davos, this time under the leadership of Donald Trump. Such restrictions, similar to those under Joe Biden, could significantly disrupt supply chains and export prospects for European technology firms.
Concerns were also expressed by Ericsson (BS:ERICAs), whose shares fell after its results were published. The company warned of the negative impact of the tariffs, which it said posed a serious threat to Europe's information and telecoms industry.
Novo Nordisk (NYSE:NVO), one of the darlings of the European market, is not in the clear either. Its shares benefited last year from optimism around obesity drugs, particularly Wegovy and Mounjaro, which were originally developed as diabetes treatments but have proved effective in reducing appetite. However, demand did not match investor expectations. Moreover, the results of clinical trials of the new drug have produced mixed conclusions. Novo Nordisk will not publish its quarterly results until 5 February.
And what about Davos?
Last Friday, one of the most important global conferences of the year took place in Davos, Switzerland. The World Economic Forum is a platform that brings together leaders from politics, business, academia, economics and other fields. Every year, more than 3,000 participants gather in this picturesque town in the Swiss Alps to discuss and find solutions to global problems. This year's event, entitled "Cooperation for the Intelligent Age", took place at a pivotal moment for world politics - coinciding with the conclusion of the Gaza ceasefire and the inauguration of the new President of the United States.
Trump’s “carrot and stick” approach
Donald Trump was one of the main topics of discussion this year. Visitors were particularly concerned about his approach to tariffs, deregulation and energy policy. Trump has openly stressed that his main goal is to ensure America's dominance on the global stage - even at the cost of strained relations with its allies. China was also a big topic, as it has rapidly transformed from the "factory of the world" into a global power, which Trump sees as a growing threat.
Because the forum began on the day of his inauguration, Trump joined the world leaders virtually via live stream. In his speech, he declared, "Under a Donald Trump administration, there will be no better place on Earth to create jobs, build factories or grow companies than right here in the good old USA."
What risks does Trump pose to Europe?
On his first day as President of the United States, Donald Trump repealed a number of energy-related regulations. In his words, America must significantly increase energy production to ensure not only its energy independence but also sufficient energy supplies for its growing AI infrastructure.
Another key objective of Trump’s policy is to lower energy prices to combat inflation and reduce Russian revenues from the energy sector. According to him, this step is crucial for ending the war in Ukraine.
One notable effect of these policies is his push for Europe to purchase more American energy. If Europe refuses, Trump has threatened to impose tariffs. His recent trade dispute with Colombia demonstrates that he is not hesitant to use tariffs as a bargaining tool.
Trump aims to use tariffs to address trade imbalances with major partners like Europe and China. Just last week, he signed a memorandum directing federal agencies to review trade agreements, with a focus on addressing unfair trade practices and market manipulation. Europe is standing on thin ice when it comes to trade with the USA, and we have yet to see how this situation develops.
What lies ahead for Europe in 2025?
Despite optimism in a few selected areas, Europe's structural problems remain unchanged. The new year still holds many unknowns. Key areas for investors to focus on include:
- Geopolitical pressures: competition with China and the US, who do not hesitate to resort to unfair practices, may hamper European growth.
- A strong dollar: It continues to push up the price of imports and weaken the euro, raising costs for European firms.
- Energy crisis and regulation: Dependence on energy imports and regulation may remain key factors affecting European corporations.