European stocks, previously underperforming compared to Wall Street, are attracting renewed investor interest. Fears of economic shocks in the U.S. under the incoming Trump administration are increasing the appeal of international markets.
Amundi, Europe’s largest investor, recently shifted its stance on European equities, stating it had “turned constructive on Europe.” The firm believes that concerns about the impact of potential trade wars on valuations have been overblown. This positive sentiment is echoed by recent data from Lipper, which showed that funds investing in European equities experienced their first weekly net inflow since October. Several major banks have also projected a market turnaround for European stocks in 2025.
While the STOXX 600 index, tracking blue-chip European shares, has experienced a slight decline this month, it has outperformed the U.S. S&P 500. The S&P has dropped significantly due to diminishing hopes for U.S. interest rate cuts and policy uncertainty surrounding the new administration.
Barclays highlighted the improving “risk-reward” profile of the European market, citing “emerging anxiety around Trumponomics.” Deutsche Bank and Citi have forecasted double-digit returns for the STOXX this year. Goldman Sachs also noted that undervalued European companies could become attractive takeover targets.
Historically, the STOXX 600 ended 2024 at its largest discount to the S&P on record, according to LSEG data. This disparity resulted from investors favoring “Trump trades,” anticipating that his policies would primarily benefit U.S. assets. However, Baird strategist Ross Mayfield suggests that “there’s room to take the other side of that trade,” and international markets, particularly Europe, stand to gain. Policy shocks could weaken the dollar, increasing U.S. investors’ interest in euro-denominated assets.
Growing concerns about tariffs potentially fueling U.S. inflation and prompting Federal Reserve rate hikes are also contributing to the shift in investor sentiment, according to a recent Bank of America survey of global fund managers. Conflicting reports regarding Trump’s tariff plans significantly impacted the U.S. currency, leaving investors anticipating further market volatility.
Raymond James Investment Management chief market strategist Matt Orton acknowledges a shift in perspective, stating, “I’ve moved from really disliking international markets to saying I think there is a diversification benefit.” He highlights the attractiveness of cheaply valued European banks, as well as the region’s aerospace and defense stocks.
The renewed interest in European equities follows a period of uncertainty stemming from political instability in France and Germany, coupled with tariff threats impacting eurozone exporters. Although the eurozone economy remains relatively weak, the long-term decline in business activity has eased following four European Central Bank rate cuts last year.
In conclusion, the combination of anxieties surrounding U.S. economic policy and the relative undervaluation of European stocks is driving a resurgence of investor interest in European markets. While challenges persist within the eurozone, the current landscape presents a potentially compelling opportunity for investors seeking diversification and value.
