After a complicated 2024, the slightest positive signal could give a boost to European equity markets in 2025.
Anthony Bailly, European Equities Portfolio Manager Rothschild & Co Asset Management.
What to Remember from 2024 ?
In European markets, 2024 was notably marked by the political instability of the Eurozone’s two largest economies. Votes of no confidence led to the appointment of a new government in France and the prospect of early elections on February 23 in Germany. This political uncertainty, coupled with the scale of France’s deficit, weighed heavily on the CAC 40, which ended in negative territory at -0.7%2. This was not the case in Germany, where the DAX rebounded by 18.6%, driven by strong performances from certain stocks (SAP, Rheinmetall, Siemens Energy) and hopes of budgetary easing. The strong performances of southern European markets, with the IBEX up 20% and the FTSE MIB up 18.9%, helped the EuroStoxx post an 8.7%1 increase. Sector-wise, China’s economic difficulties weighed on the commodities, luxury, and automotive sectors, all ending in negative territory. Conversely, tensions over rates—supported by resilient inflation—propelled banking and insurance sectors to the top of the performance rankings.
Another notable feature was the divergence with the United States. American exceptionalism was evident throughout the year, allowing for significantly stronger economic growth and corporate earnings compared to Europe. This attracted significant inflows, with U.S. equity markets capturing $480 billion1, a trend that intensified following Donald Trump’s election. Conversely, outflows from European equities continued, amounting to $65 billion. The region’s weighting in global allocations has never been lower. This dynamic is also reflected in valuations: European equity markets are trading near historical averages (P/E3 of 13.2x), while U.S. markets, with a P/E of 22.2x, are at historical highs1. The valuation gap between European and U.S. markets, now exceeding 40%, has never been wider.
What Is Your Central Scenario for 2025 ?
Expectations for Europe are very low this year, with fragile economic growth projected at around 1% and earnings per share growth estimated at 7-8% according to consensus1. Deteriorated PMI4 indicators reflect a high level of uncertainty among economic agents. The lack of a rebound in China, concerns about upcoming tariffs, and Trump’s inflationary policies add to Europe’s political difficulties.
However, some elements could counterbalance these concerns. Trump’s entry into the White House could yield positive effects not yet priced in. Firstly, his stated desire to quickly resolve the Russia-Ukraine conflict could reduce the risk premium weighing on European markets since the conflict began. President Zelensky remains dependent on U.S. funding, potentially forcing a compromise.
Secondly, increased military spending within NATO member states could push Germany to relax its budgetary constraints. Additionally, once U.S. tariff hikes are announced, China may calibrate a fiscal stimulus plan likely oriented toward domestic consumption, indirectly benefiting Europe. Finally, while inflation is already more resilient in the U.S. than in Europe, Trump’s inflationary agenda suggests the Fed may maintain a hawkish5 tone as indicated in its December meeting. Conversely, Europe’s ongoing inflation decline offers the ECB more room for maneuver. Continued rate cuts could support credit, revitalize economic activity, and ultimately benefit equity markets.
Tailwinds and Headwinds?
European market underperformance largely stems from uncertainties around fragile economic growth, rising tariffs, and political instability in Europe—all factors widely recognized by investors. This raises the question of whether this underperformance is set to continue, given the historically high valuation gap between European and U.S. markets and Europe’s economic strengths. Real wages continue to grow amid a healthy labor market, while excess savings only await a return of confidence to be unleashed. Conversely, with a P/E of 22.2 and projected EPS6 growth of 15%, the U.S. market appears vulnerable to economic weakness or normalization of AI-related growth rates1.
European markets also offer numerous opportunities, including investing in undervalued European champions with strong international exposure and sectors likely to benefit from plausible catalysts. These include construction, which would benefit from an end to the Ukraine conflict; real estate, which would welcome a more accommodative ECB policy; and industrial sectors (commodities, chemicals, industrial goods, automotive) poised to gain from German and/or Chinese stimulus plans.
More broadly, sectors currently priced for a slowdown could rebound if sentiment improves. In this regard, the “Value”7 style could regain favor after slight underperformance in 2024. Finally, differentiation factors also offer promise. Europe is leading the ecological transition, home to major players in this field. Expected rate cuts should reignite investments in this theme. Europe’s head start in clean energy could become an asset as AI-driven energy demand rises.
[1] Bloomberg, 12/31/2024. Performance expressed in local currencies, dividends reinvested.
[2] Bloomberg, 12/31/2024. Euro performance calculated with dividends reinvested.
[3] Source : Eurostat, U.S. Bureau of Labor Statistics, December 2024.
[4] The “Magnificent 7” refers to seven U.S. technology companies: Microsoft, Nvidia, Tesla, Meta, Apple, Alphabet, and Amazon.
[5] Source : Consensus December 2024.
[6] Favorable positioning for a more restrictive monetary policy to combat inflation.
[7] Scenario in which inflation slows but unemployment does not rise.
