Europe: Out Of the Frying Pan and Into the Fire?
So far this year, European equities have outperformed U.S. equities, with MSCI Europe up nearly 18% in dollar terms, the Euro Stoxx 50 up 20%, and the DAX up an incredible 28% in dollar terms. Is this the start of a new era for the long-moribund European equity markets, or just a flash in the pan?
European vs. U.S. equities
The oft-reported reason for this dynamic change is often claimed to be capital flight due to the new Trump administration and potential political instability.
To analyze this thoroughly, we should divide it into politics and fundamentals.
Politics
The first is the rise of political instability and uncertainty in the United States. While this is undoubtedly true in Europe, there is a strong case that political uncertainty is higher.
The previous German government collapsed after the coalition fell apart; the new one is another ugly mismatch between the centre-right and the fast-collapsing centre-left party. The new German Chancellor even failed to win a prearranged confirmation vote and was only elected in the second round—hardly a ringing endorsement of his likely political longevity.
President Macron has lost nearly all power in France and is more of a dead duck than a lame-duck president. Italy is another coalition—which at least has the advantage of being from the same side of the political divide—but is somewhat hampered by the fact that the average length of time for an Italian government is 1.1 years. All this is before the problems at the European Union itself—something that even one of the high priests of pan-Europeanism, Mario Draghi, highlighted in his recent report as a deeply dysfunctional organization needing radical change.
Of the major European economies, only the United Kingdom has a strong government. Unfortunately, by recent UK standards, it’s also very left-wing. It came to power after right-wing voters didn’t bother to turn up at the last general election due to the ineptitude of their party’s 14 years in power. Since then, the UK economy has slowed almost to a halt, economic confidence has dropped to the lowest level on record, and the financial situation continues to deteriorate due to the fiscal recklessness of the government’s heavy spending on welfare.
All of these countries are seeing sharp rises in voter support for right-wing populist parties.
This analysis also doesn’t consider the destabilizing effect of a major war on the use of the eastern borders in Ukraine. President Trump might declare that he can finish the wall within 24 hours—something he has so far failed to achieve—but ending the war is not necessarily in his purview. For the Europeans, stopping Russian aggression is viewed as existential. Despite lacking military might, they’ve continued to finance Ukraine’s economy and war effort. Additionally, many of the things Putin is demanding— such as re-admission to the SWIFT payment network, the removal of sanctions, and the restarting of energy exports—will be decided by the Europeans, not the Trump administration. Hence, they are very unlikely to agree to any of this.
Whilst the Europeans Lack US Military Hardware, They Remain Deeply Committed to Supporting Ukraine Financially
Source: Ukraine Support Tracker, IFW Kiel Institute for the World Economy, https://www.ifw-kiel.de/topics/war-against-ukraine/ukraine-support-tracker/. Based on data from Trebesch et al., 2023, “The Ukraine Support Tracker: Which Countries Help Ukraine and How?” Kiel Working Paper 2218 (February).
Economics – A Lot of Noise but Little Action
This large military expenditure was the only positive for the European economy. The engine room of that economy—Germany—not only continues to post extremely weak economic data but also has serious worries that its entire economic business model, based around manufacturing exports, is broken.
Germany faces multiple structural challenges: an aging workforce, the loss of cheap energy from Russia, and serious technological obsolescence in its core automotive industry, especially when compared to Chinese competitors in major export markets. The UK’s exit from the single market continues to weigh on trade. Meanwhile, Trump is likely to impose tariffs, China no longer needs European capital goods, and the European Union itself is increasingly burdened by debt and weak internal demand, limiting its ability to absorb German exports.
France has debt and deficit levels similar to those of the United States but with even lower growth. The government already accounts for over half of GDP, while Italy is, well, Italy.
The IMF Continues to Have Europe Lagging the United States
Source: “A Critical Juncture Amid Policy Shifts,” 2025, International Monetary Fund (April).
The recent outperformance is perhaps a technical adjustment.
There have been outflows from the United States and into Europe. But it’s important to remember that European fund managers had long been overweight U.S. stocks relative to their benchmarks. They also tend to be more conservative than U.S. managers and have grown increasingly concerned about U.S. stock valuations for some time in the face of an inevitable economic slowdown. The likely imposition of tariffs and potential changes in the tax code have accelerated already underlying concerns.
This recent equity outperformance reflects a rebalancing and an element of undervalued European assets finally catching up. While valuation certainly plays a role, it’s crucial to remember that these lower valuations often reflect the underlying lack of robust growth across the continent. In fact, except for the UK and possibly Spain, the recent run-up in European equities has started to make them look expensive by historical standards.
While there are undoubtedly some impressive companies in Europe beyond the headline names, the U.S. offers a plethora of mid-tier firms with comparable valuations operating within a far more dynamic and innovative economic landscape.
Plus, for all its flaws, the dollar will remain a recognizable currency for the foreseeable future—something that cannot be said for the euro, another consideration for those seeking to venture into the Old World.
Disclosure: The views expressed herein are those of the author and do not necessarily reflect the views of Rayliant Investment Research. The material is for informational purposes only and should not be considered investment advice. Indices cannot be invested in directly and are unmanaged. The opinions contained herein are subject to change without notice.
Advisory Services offered through Sowell Management, a registered investment adviser. This material is for information purposes, educational purposes, and/or illustrative use only. The material presented does not constitute investment advice and is not intended as an endorsement of any specific investment. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. Investing involves risk including the potential loss of principal, and unless otherwise stated, are not guaranteed. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
The views are subject to change and are not intended as a forecast or guarantee of future results. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Trek Wealth Solutions believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Trek Wealth Solutions’ view as of the time of these statements.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.
The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.
Europe: Out of the Frying Pan and Into the Fire?
Europe: Out Of the Frying Pan and Into the Fire?
So far this year, European equities have outperformed U.S. equities, with MSCI Europe up nearly 18% in dollar terms, the Euro Stoxx 50 up 20%, and the DAX up an incredible 28% in dollar terms. Is this the start of a new era for the long-moribund European equity markets, or just a flash in the pan?
European vs. U.S. equities
The oft-reported reason for this dynamic change is often claimed to be capital flight due to the new Trump administration and potential political instability.
To analyze this thoroughly, we should divide it into politics and fundamentals.
Politics
The first is the rise of political instability and uncertainty in the United States. While this is undoubtedly true in Europe, there is a strong case that political uncertainty is higher.
The previous German government collapsed after the coalition fell apart; the new one is another ugly mismatch between the centre-right and the fast-collapsing centre-left party. The new German Chancellor even failed to win a prearranged confirmation vote and was only elected in the second round—hardly a ringing endorsement of his likely political longevity.
President Macron has lost nearly all power in France and is more of a dead duck than a lame-duck president. Italy is another coalition—which at least has the advantage of being from the same side of the political divide—but is somewhat hampered by the fact that the average length of time for an Italian government is 1.1 years. All this is before the problems at the European Union itself—something that even one of the high priests of pan-Europeanism, Mario Draghi, highlighted in his recent report as a deeply dysfunctional organization needing radical change.
Of the major European economies, only the United Kingdom has a strong government. Unfortunately, by recent UK standards, it’s also very left-wing. It came to power after right-wing voters didn’t bother to turn up at the last general election due to the ineptitude of their party’s 14 years in power. Since then, the UK economy has slowed almost to a halt, economic confidence has dropped to the lowest level on record, and the financial situation continues to deteriorate due to the fiscal recklessness of the government’s heavy spending on welfare.
All of these countries are seeing sharp rises in voter support for right-wing populist parties.
This analysis also doesn’t consider the destabilizing effect of a major war on the use of the eastern borders in Ukraine. President Trump might declare that he can finish the wall within 24 hours—something he has so far failed to achieve—but ending the war is not necessarily in his purview. For the Europeans, stopping Russian aggression is viewed as existential. Despite lacking military might, they’ve continued to finance Ukraine’s economy and war effort. Additionally, many of the things Putin is demanding— such as re-admission to the SWIFT payment network, the removal of sanctions, and the restarting of energy exports—will be decided by the Europeans, not the Trump administration. Hence, they are very unlikely to agree to any of this.
Whilst the Europeans Lack US Military Hardware, They Remain Deeply Committed to Supporting Ukraine Financially
Economics – A Lot of Noise but Little Action
This large military expenditure was the only positive for the European economy. The engine room of that economy—Germany—not only continues to post extremely weak economic data but also has serious worries that its entire economic business model, based around manufacturing exports, is broken.
Germany faces multiple structural challenges: an aging workforce, the loss of cheap energy from Russia, and serious technological obsolescence in its core automotive industry, especially when compared to Chinese competitors in major export markets. The UK’s exit from the single market continues to weigh on trade. Meanwhile, Trump is likely to impose tariffs, China no longer needs European capital goods, and the European Union itself is increasingly burdened by debt and weak internal demand, limiting its ability to absorb German exports.
France has debt and deficit levels similar to those of the United States but with even lower growth. The government already accounts for over half of GDP, while Italy is, well, Italy.
The IMF Continues to Have Europe Lagging the United States
The recent outperformance is perhaps a technical adjustment.
There have been outflows from the United States and into Europe. But it’s important to remember that European fund managers had long been overweight U.S. stocks relative to their benchmarks. They also tend to be more conservative than U.S. managers and have grown increasingly concerned about U.S. stock valuations for some time in the face of an inevitable economic slowdown. The likely imposition of tariffs and potential changes in the tax code have accelerated already underlying concerns.
This recent equity outperformance reflects a rebalancing and an element of undervalued European assets finally catching up. While valuation certainly plays a role, it’s crucial to remember that these lower valuations often reflect the underlying lack of robust growth across the continent. In fact, except for the UK and possibly Spain, the recent run-up in European equities has started to make them look expensive by historical standards.
While there are undoubtedly some impressive companies in Europe beyond the headline names, the U.S. offers a plethora of mid-tier firms with comparable valuations operating within a far more dynamic and innovative economic landscape.
Plus, for all its flaws, the dollar will remain a recognizable currency for the foreseeable future—something that cannot be said for the euro, another consideration for those seeking to venture into the Old World.
Disclosure: The views expressed herein are those of the author and do not necessarily reflect the views of Rayliant Investment Research. The material is for informational purposes only and should not be considered investment advice. Indices cannot be invested in directly and are unmanaged. The opinions contained herein are subject to change without notice.
Advisory Services offered through Sowell Management, a registered investment adviser. This material is for information purposes, educational purposes, and/or illustrative use only. The material presented does not constitute investment advice and is not intended as an endorsement of any specific investment. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. Investing involves risk including the potential loss of principal, and unless otherwise stated, are not guaranteed. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
The views are subject to change and are not intended as a forecast or guarantee of future results. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Trek Wealth Solutions believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Trek Wealth Solutions’ view as of the time of these statements.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.
The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.