Europe not really exceptional

Renco van Schie of Valuedge understands why investors are no longer buying European stocks. Weak economic growth, modest corporate earnings, and relatively high stock prices make European stocks unattractive, in his view.

In the first months of 2025, I read it regularly: Trump Makes Europe Great Again (MEGA). The new US policy brought a revolution in Germany. Major investments in infrastructure and defense would boost the ailing European economy.

This Wind of Change caused investors to enthusiastically start buying European shares. The Eurostoxx 600 index was up more than 10% in the first week of March. Its outperformance versus the S&P 500 index in the first quarter was the largest in almost 30 years.

As on previous occasions when European equities outperformed US equities, this appears to have been short-lived. The Eurostoxx 600 is now only 5% higher for 2025 and has been overtaken by the S&P 500 (+6% in dollars). The turnaround in relative performance took place around April 20, and since then US equities have been on a steady rise. In my view, the main reason for this is the superior performance of US companies.

American companies are performing better

Now that more than 50% of companies in the US and Europe have reported their second quarter results, we are seeing the same picture that has been repeated for many quarters: America is performing much better than Europe. The 2% year-on-year decline in revenue in Europe contrasts sharply with the 7% growth in the US.

The difference in profit growth is even more extreme. While American companies are showing average profit growth of 10%, European companies are down 4%. No wonder that in recent months, shares in Europe have been falling while those in the US have been rising.

European growth remains elusive for now

For European companies to post better figures, economic growth of more than 1.5-2.0% is needed. The new course set by the US is indeed causing a shift in political thinking in Europe. Additional fiscal stimulus measures will undoubtedly have a positive effect on the European economy in the longer term.

However, we should not be overly optimistic in the short term. Forecasts by economists and the ECB predict that the European economy will grow by barely more than 1% in 2025 and 2026. The recently announced trade agreement between the US and the EU, which is seen as a capitulation by the EU, will also hamper growth in the short term.

Asia is a better alternative

In comparing the returns on European and US equities, I have not taken into account the exchange rate between the euro and the dollar. For European investors who have not hedged their currency risk, the more than 10% decline of the dollar against the euro means that returns on American shares will be negative in 2025. I do not believe this is an argument for investing more in European shares. It would be more logical to hedge currency exposure.

For years, investors had an underweight position in European equities. At the beginning of this year, they tactically adjusted to neutral. The conviction to become strategically overweight has been lacking so far. Fund flow data shows that investors have been selling European equities again in recent months. The rebound in share prices, combined with falling corporate profits, also means that European equities are no longer cheap from a historical perspective.

At present, I see no reason to maintain a larger than neutral position in European equities. I am waiting for signs that the growth outlook is set to improve significantly. US equities remain highly valued due to their recent rise. For greater diversification in the equity portfolio, I currently see Asia as the best alternative.

Sources: Renco van Schie, Oleksandra Kyrleiza