European equities have outperformed the US market since the start of 2025, driven by several key factors including increased bank lending, easing inflation, and a boost to Germany’s economy. Despite some headwinds, such as a potential trade war with the US, analysts are cautiously optimistic on Europe.
A positive story is emerging from European markets, which have demonstrated resilience in recent years. The MSCI European Monetary Union index has risen +8.6% year-to-date, outperforming the -5% decline in the S&P 500. Several factors contribute to this improved outlook, including:
* German fiscal shift: Post-election changes in Germany have led to optimism about the country’s stagnant economy. Plans for a €500 billion infrastructure plan could help drive growth and create investment opportunities.
* Favorable policy environment: The European Central Bank has been aggressive in rate easing, leading to an increase in bank lending. This is a positive indicator for business growth.
* Defense spending: Plans to increase defense budgets, potentially funded by joint bonds, could strengthen European economic cohesion and create investment opportunities.
However, Europe also faces significant headwinds, including:
* US trade war: US tariffs could cut European GDP by ~0.5%, which is significant given the low 1% GDP growth consensus.
* Fiscal deficits: Countries such as Germany have increased fiscal space, but others, like France, face high deficit levels, creating potential risks for broader European stability.
Despite these challenges, analysts remain cautiously optimistic about Europe’s growth prospects. The uptick in bank lending and signs of resilience suggest that the region is showing signs of renewed optimism after a tough decade. However, the big question now is whether this can last.
Source: https://www.advisorperspectives.com/commentaries/2025/03/16/europe-bright-spot-market-uncertainty