Investment Tip – June

After the recovery rally since April – Will European equity markets continue to excel?

Since hitting a tariff-induced low on April 8, global equity markets, particularly US indices, have recovered rapidly, recouping their year-to-date losses. This recovery was driven by improved investor sentiment, robust corporate earnings, and expectations of economic stimulus measures. Although elevated volatility persists, market participants' mood has shifted from risk averse to cautiously optimistic. Temporary relief in the US-China trade conflict has played an important role in this development, reducing risks.

Fig.1 S&P 500 recovers rapidly from the tariff-induced shock

Europe as the beneficiary of the changed era of "US exceptionalism"

US President Donald Trump’s unpredictable trade policy has led to a reassessment of the era of "US exceptionalism." This concept refers to the unique position of the United States as the dominant economic power and a leading player in global financial markets, underpinned by economic strength, innovative capacity, the US dollar’s role as a reserve currency, and geopolitical influence. This special status has enabled the US to attract capital and establish its financial markets as the most stable worldwide.

A reassessment of this era therefore directly impacts assets that underpin US economic dominance: the dollar and US Treasuries. Two traditional safe havens have suddenly become less attractive and are seeing increased capital outflows. The precise extent to which foreign investors have reduced their holdings of US Treasuries – and thus their USD positions – will only become clear in a few weeks. With the possible end of US exceptionalism, investors are now questioning the implications of these capital flows. Europe, as the world’s second-largest economy with the second global reserve currency, seems to be one of the main beneficiaries. This is reflected in European equity markets, which have significantly outperformed their global peers so far this year.

Fig. 2 Comparison of key equity markets, year-to-date performance and 12-month forward price-earnings ratio (P/E)

Reasons for the outperformance of European equities

European equities started 2025 at a significant valuation discount compared to their US counterparts, attracting both domestic and international investors. However, experience shows that a valuation discount alone is not sufficient to generate outperformance; it must be accompanied by positive catalysts. These came in the form of robust corporate earnings in the first quarter, the temporary suspension of US tariffs, and indications that China – a key market for European companies – is aiming to revive consumer demand. Additionally, European markets have benefited from supportive monetary policy conditions. The European Central Bank (ECB) has already cut its key interest rate three times by 0.25% each in 2025 and signaled further easing, whereas the US Federal Reserve is pursuing a more cautious approach.

From a structural perspective, political stability and fiscal stimulus are also contributing to positive market sentiment. Political developments in Europe, particularly in Germany, indicate fiscal support for the economy through planned investments in infrastructure and defense, as well as an easing of the debt brake. These measures reinforce investor confidence in the region’s long-term stability. Furthermore, European banks have gradually regained investor trust since the global financial crisis and the European sovereign debt crisis. By meeting new capital requirements, banks have significantly strengthened their balance sheets.