European stocks are trouncing their US counterparts.
Can it continue? Probably not, says Barclays, with the rotation from US to European stocks looking “stretched” after a record-breaking run and the valuation gap having “substantially narrowed”.
European stocks entered 2025 looking cheap relative to historical norms, but have now re-rated to their long-term average. Meanwhile, a “fair amount of uncertainty” is now baked into US stocks, with the critical technology sector trading at its lowest valuation multiple in over a year.
However, others reckon 2025 marks the beginning of a long-term trend.
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Fiscal stimulus should swing earnings growth from the US to Europe in coming years, says Panmure Liberum’s Joachim Klement, boosting annual returns for European stocks to at least 10 per cent – the historical average for secular bull markets.
Klement’s calculations indicate the S&P 500 will return around 7 per cent annually if valuations persist at today’s elevated levels, or closer to 6 per cent if valuations normalise.
In other words, says Klement, we are likely to see a “Zeitenwende”, or epochal change, not only in German fiscal policymaking but in global stock markets.
That’s echoed by JPMorgan’s Karen Ward, who says Europe has been on a tight fiscal, monetary and regulatory leash since the global financial crisis, while America has let loose over the same period – a backdrop that helped boost the US weighting in global indices from 42 to 66 per cent since 2009.
European stocks still trade at a big discount to their US counterparts, she says.
That discount is shrinking, but the question is how much further it can go.
