European equities are projected to deliver lackluster returns in 2025, trailing behind the anticipated growth of US stock markets. A Bloomberg survey of 20 strategists forecasts the Stoxx Europe 600 Index to reach 535 points by the end of 2025, representing a meager 3% increase from its current level. This pales in comparison to the projected 7.5% average growth for the S&P 500, with some estimates reaching as high as 17%.
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Persistent Underperformance and Political Headwinds
Despite an 8% gain this year, the Stoxx 600 is on track for one of its worst performances relative to the S&P 500 in recent history. Political instability in France and Germany, coupled with sluggish economic growth, have hampered European equities. Conversely, the US market has benefited from a resilient economy and robust demand for megacap stocks, further fueled by advancements in artificial intelligence. The potential for renewed trade tariffs under a new presidential administration adds another layer of uncertainty for European markets.
Frederic Dodard, head of asset allocation at State Street Global Advisors Ltd., acknowledges the healthy balance sheets and attractive valuations of European companies. These factors support the expectation of modest share price appreciation in the coming year. However, he cautions that “political uncertainty and the strong performance of US equities are not helping European equities to regain momentum,” leading to a “constructively cautious” outlook for the region.
Varied Forecasts and Underlying Concerns
The Bloomberg survey reveals a range of predictions, with 85% of strategists anticipating the Stoxx 600 to close 2025 at or above 530 points. Citigroup Inc. and Deutsche Bank AG, among the most accurate forecasters for 2024, project gains of 10% and 13%, respectively, for the upcoming year. Citigroup’s Beata Manthey cites “solid but below consensus” corporate earnings growth and stabilizing earnings revisions as reasons for optimism. She notes that fewer companies are issuing downward revisions, and stock valuations are rising despite the threat of US tariffs.
However, concerns linger regarding the feasibility of projected earnings growth for 2025. Bottom-up estimates from analysts anticipate 8% earnings-per-share growth for Europe, only slightly below US projections. This level of growth appears overly optimistic to many strategists, particularly given the euro area’s projected economic growth rate of just 1.1%. TFS Derivatives and UBS Group AG, known for their bearish outlooks, forecast a decline of nearly 10% for the Stoxx 600, citing weakness in sales and margins that could drag down earnings by 5%. UBS strategist Gerry Fowler points to persistent weakness in China, potential slowing US growth, and diminishing pricing power for European companies as key factors contributing to this pessimistic outlook. He also highlights the potential negative impact of trade policies on Europe.
Transatlantic Valuation Gap and Potential Catalysts
The divergence in performance between European and American stocks has resulted in a record valuation gap. The S&P 500’s 27% surge this year, driven by AI enthusiasm and a strong dollar, has further widened the difference in forward price-to-earnings multiples to approximately 40%.
Historical performance of the Stoxx Europe 600 Index.
While the FTSE 100 is expected to see a 5% rise after a lackluster year, forecasts for Germany’s DAX and the Euro Stoxx 50 are more modest, with anticipated gains of around 1% and 3%, respectively. Barclays Plc strategist Emmanuel Cau suggests that US “exceptionalism” may persist, but acknowledges that Europe’s underperformance “looks overdone versus fundamentals.” He points to potential catalysts such as political shifts in Germany, progress in resolving the conflict in Ukraine, and further stimulus measures in China as factors that could improve the outlook for European equities.
Conclusion: Cautious Optimism Tempered by Challenges
The outlook for European stocks in 2025 remains tempered by political and economic uncertainties. While attractive valuations and potential catalysts offer glimmers of hope, the projected growth significantly lags behind that of the US market. Investors should approach European equities with cautious optimism, carefully considering the potential risks and rewards in this complex landscape.
