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The European Equity Revival: A New Bull Market? (Q1 2025)

  • peachgardenpartner
  • Feb 19
  • 4 min read

Updated: Feb 21

By Danila Zagoruiko


Executive Summary


European equities have made a strong start to 2025, with the STOXX Europe 600 Index up 6% YTD, significantly outperforming the S&P 500 and many global peers.

Key factors fuelling this rally:


  • Valuations remain attractive

    • European equities trade at a record-low valuation discount to U.S. stocks, with a 14x forward P/E vs. 22x for the S&P 500.


  • ECB policy easing 

    • The European Central Bank (ECB) has cut rates earlier than the U.S. (now at 2.75%), providing economic stimulus.


  • Geopolitical stabilisation 

    • Expectations of a Russia-Ukraine ceasefire are reducing risk premiums and supporting investor sentiment.


  • Sectoral performance shift

    • Financials, industrials, and select tech names lead the charge, while European luxury goods rebound as China’s economy recovers.


  • Massive outperformance in European banks 

    • The STOXX 600 Banks Index has gained 100%+ since 2022, beating the 90% return of the "Magnificent Seven" U.S. tech stocks.


The question now is whether this rally can be sustained as investors weigh economic momentum, corporate earnings, and global risks.



Macro Overview

Key Indicators at a Glance (14.02.2025)

Indicator

Latest Value

Previous Value

YoY Change (%)

STOXX Europe 600 Index

557.61

487.05

+14.5%

STOXX 600 Banks Index

253.05

170.93

+48.1

S&P 500 Index

6,118.71

5,960.00

+2.7%

Eurozone Manufacturing PMI

45.1

45.2

-0.2%

Eurozone GDP Growth (YoY)

0.9%

0.5%

+0.4 pp

(Source: PGP Investment Group, Yahoo Finance)
(Source: PGP Investment Group, Yahoo Finance)


Economic Developments


Valuations and Investor Sentiment

European equities are trading at a 30% discount to U.S. stocks on a P/E basis—the widest gap in decades.

  • The STOXX Europe 600 trades at 14x forward earnings, compared to 22x for the S&P 500.

  • This valuation gap has drawn investors seeking better risk-adjusted returns.

  • Fund flows into European ETFs have increased by 12% YTD, the highest level since 2018.


Monetary Policy Easing

  • The ECB cut rates by 25bps to 2.75% in January 2025, making it the first major central bank to ease policy.

  • Lower rates are boosting borrowing and investment, with credit growth improving in Germany and France.

  • The Fed, meanwhile, is expected to delay its first rate cut until mid-2025, keeping U.S. monetary policy relatively tight.


Geopolitical Stabilisation

  • The hopes of a Russia-Ukraine ceasefire are reducing economic uncertainty, leading to:

    • Lower European natural gas prices (-15% YTD)

    • Stronger business sentiment in Eastern Europe

    • Increased investment flows into European industrials



Sectoral Performance


Banking Sector Outperformance

The STOXX 600 Banks Index has surged 100%+ since 2022, outpacing even the "Magnificent Seven" U.S. tech stocks (+90%).

  • Higher interest rates in 2022-2024 significantly boosted European bank profits.

  • Banks are returning cash to shareholders, with an average 10% pay-out yield (dividends + buybacks).

  • Leading performers:

    • BNP Paribas (+12% YTD)

    • Deutsche Bank (+14% YTD)

    • Santander (+9% YTD)


Technology Sector – Europe vs. U.S.

  • While the "Magnificent Seven" have seen mixed returns this year, European tech stocks have gained momentum.

  • Key outperformers include:

    • ASML (+8.6% YTD) – the global leader in semiconductor lithography machines.

    • SAP (+10.2% YTD) – benefiting from strong enterprise AI demand.

    • Infineon (+7.9% YTD) – riding the wave of auto-chip demand.


Luxury Goods – Benefiting from China

  • China’s economic recovery has fuelled renewed demand for European luxury brands.

  • LVMH (+6.1% YTD), Hermès (+5.8%), and Richemont (+7.4%) are all benefitting from improved Chinese consumer spending.



Policy and Regulatory Environment


European Fiscal Policies

  • Germany’s upcoming election could lead to increased infrastructure investment and lower energy costs.

  • Europe is also considering tax incentives for semiconductor and AI investments to compete with the U.S. CHIPS Act.


U.S. Tariff Uncertainty Boosts Europe

  • Uncertainty around President Trump’s proposed tariffs has made European markets more attractive to U.S. investors.

  • Fund flows into European equities have risen 12% YTD, reflecting growing investor interest.


Market Implications

  • European equities are gaining relative strength vs. U.S. stocks as rate cuts, geopolitical stabilisation, and strong earnings fuel investor confidence.

  • The undervaluation of European stocks suggests more upside potential, particularly in financials, industrials, and luxury goods.

  • Sectoral rotation out of U.S. mega-cap tech into value-driven European stocks is accelerating.



Forecasts and Projections


Short-Term (Next 6 Months)

  • STOXX Europe 600 Target: 500+ (based on current earnings growth).

  • Banking Sector: 5-7% further gains as buybacks and dividends drive returns.

  • Luxury Goods: Continued strength as China’s consumer recovery accelerates.


Long-Term (12+ Months)

  • Sustained Growth Potential: If monetary easing continues, European equities could outperform U.S. markets for the first time in over a decade.

  • Potential Risks: Slower-than-expected GDP growth or renewed geopolitical tensions.

(Source: PGP Investment Group)
(Source: PGP Investment Group)


Key Takeaways


  1. European equities have gained 6% YTD, led by banks, luxury goods, and industrials.

  2. Valuations remain attractive, with a 30% discount to U.S. stocks.

  3. Sectoral rotation is underway as investors move away from overvalued U.S. tech into European opportunities.

  4. The ECB has cut rates before the Fed, adding a monetary policy tailwind for European stocks.

  5. The rally is just beginning, and analysts see more room to run.



Sources

  1. Financial Times (2025) 'European Equities Step Out of U.S. Shadow'. Available at: https://www.ft.com (Accessed: 14 February 2025).

  2. Reuters (2025) 'Goldman Sachs Raises 12-Month STOXX 600 Forecast Amid Economic Strength'. Available at: https://www.reuters.com (Accessed: 14 February 2025).

  3. Bloomberg (2025) 'European Stocks See Strongest Start to Year Since 2015'. Available at: https://www.bloomberg.com (Accessed: 14 February 2025).

  4. Morningstar (2025) 'Will European Stocks Finally Outperform the U.S. Market?'. Available at: https://www.morningstar.com (Accessed: 14 February 2025).

  5. European Central Bank (2025) 'ECB Rate Cuts: Economic and Market Impact'. Available at: https://www.ecb.europa.eu (Accessed: 14 February 2025).

  6. J.P. Morgan Asset Management (2025) 'Outlook for European Equities: Catalysts for Growth'. Available at: https://am.jpmorgan.com (Accessed: 14 February 2025).

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