(Bloomberg) -- European investors are starting to wonder just how long the hot winning streak for the region’s stocks is going to last, even as possible talks to end the war in Ukraine send the market to fresh record highs.
The Stoxx Europe 600 Index has risen 8% this year through Wednesday versus a gain of less than 3% for the US S&P 500. The outperformance has been fueled by what seems a convincing investment case: Shares are cheap, interest rates are going down and earnings are holding up.
Skeptics say Europe lacks the dynamic economy needed to keep the frenzy going. Fear of missing out could fuel the momentum for a bit longer, but that’s likely to run out of steam, they say. Already the rally has added more than $1 trillion to the value of the Stoxx 600, which has enjoyed the best start to the year relative to the S&P 500 in at least 25 years.
“This could continue for a few weeks or months amid investor FOMO but betting that Europe will outperform the US over the year, that’s a bit of a stretch for now,” said Enguerrand Artaz, a macro strategist and fund manager at La Financière de l’Echiquier in Paris.
The European Central Bank has warned its modest forecast for 1.1% growth this year could be reduced, while by contrast many strategists say the Federal Reserve’s expectation of a 2.1% expansion could end up being revised higher. In the UK, the economy is barely growing.
“These flows that you see towards Europe are purely tactical,” reckons Christopher Dembik, senior investment manager at Pictet AM in Paris. “Even if the war ended, I’m not sure that a relief rally would last more than a few weeks.”
There’s a risk that the high yields on offer in US bonds will pull capital out of European equities and into the US Treasury market, he says. The US 10-year note yields about 4.60%, a percentage point higher than its recent low in September and the highest among G-10 economies.
That essentially risk-free return might look attractive to investors who switch among asset classes. It may get more appealing in coming months if US President Donald Trump’s trade and immigration agenda fuels inflation and prevents further interest rate cuts by the Federal Reserve.
Data on Wednesday showed US inflation in January rose by the most since March, supporting the Fed’s cautious approach to lowering rates.
One of the reasons Europe is leading global equity markets is because it was seen as a cheap hiding place when technology stocks swooned last month, said Marija Veitmane, a senior multi-asset strategist at State Street Global Markets.
That drop, triggered by concerns about Chinese startup DeepSeek’s inexpensive AI model, fueled a narrative about the end of the so-called “exceptionalism” of US mega-cap tech companies and the need to rotate portfolios back to Europe.
But Europe’s outperformance can’t be taken as a vote of confidence, Veitmane says, given what she sees as the region’s weak economic fundamentals and sluggish growth.
Strategists in a Bloomberg survey last month said the Stoxx Europe 600 would end the year at 534 points; it’s already 3.3% above that level and setting fresh record highs. Strategists at UBS Group AG said Thursday they expect Europe’s outperformance versus the US to persist in the near term, with catalysts from a potential ceasefire in Ukraine and likely lower energy prices.
For European markets to still be outperforming the US by the end of the year, everything has to go right, said Amelie Derambure, a portfolio manager at Amundi.
What Bloomberg Intelligence says....
The rotation from US equities into EU ones has pushed the Euro Stoxx 50’s valuation to its highest point since the start of the war in Ukraine (forward P/E of 14.8x), implying the need for more rate cuts from the ECB and an earnings growth rebound in the coming two years. Yet, so far since Donald Trump’s election, EPS estimates revisions don’t share the enthusiasm and technical indicators send mixed signals.
The list includes a ceasefire in Ukraine, a rebound in euro-area manufacturing, a decline in natural gas prices, comprehensive economic stimulus in China, a spike in German public spending and moderate US tariffs, she said.
“If we get all of that, or at least some of it, then given the relative expensiveness of the US markets, then, yes Europe could outperform this year,” she said. After such a stellar start of the year, and given the possibility of a trade war, “it’s wise to stay diversified,” she added.
--With assistance from William Horobin, Sujata Rao, Michael Msika and Jan-Patrick Barnert.
(Updates to add fresh record high in first paragraph, UBS note in 13th.)
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