European equities have outperformed US stocks this year by the largest margin since 2000, according to Morgan Stanley. European stocks have risen on hopes of increased defense spending and an end to the war in Ukraine, which could stimulate growth. The German DAX index has gained nearly 17% so far this year, while France’s CAC 40 has risen 11.5% and Britain’s FTSE 100 has advanced 9%. In contrast, the S&P 500 is up less than 1%.
The recent economic indicators suggest a stabilizing European economy that may receive support from interest-rate cuts. European stocks have entered 2025 looking undervalued, with a forward price-to-earnings ratio of just 14x compared to America’s 22x. This has encouraged investors to turn to Europe for potential better returns.
Defense spending and the end of the war in Ukraine are also driving investor interest in Europe. Reconstruction in Ukraine could require $500 billion in construction spending over the next decade, while an end to the war may lead to resumption of natural gas flows from Russia, lowering energy costs and relieving inflation. European leaders have been urged to boost defense spending by US President Trump’s stance toward fellow NATO members.
The European economy appears to be turning a corner after years of sluggish growth. Purchasing manager index readings have improved, suggesting the manufacturing and services sectors are on the mend. Analysts are optimistic about corporate earnings growth in Europe. Monetary policy is expected to be more supportive than in the US, where investors expect fewer interest rate cuts this year.
Analysts believe that stimulus from defense spending and Ukrainian reconstruction can jolt the European economy out of its current malaise. However, there remains caution due to President Trump’s stance on Russia and Ukraine, which could lead to material uncertainty.
Source: https://www.investopedia.com/why-european-stocks-beating-the-s-and-p-500-this-year-11689769