Europe finds itself in a situation of maximum tension with its gaze fixed squarely on Washington. The coming months could be totally decisive in understanding what the impact of Donald Trump’s arrival will be for European territory, although the consequences have been filtering even before the inauguration, with the euro in low hours and the ECB stating that it is time prepare to resist a possible tariff wave. Only the Fed’s pause, which occurred due to the idea that the Republican would make inflation pick up, has generated an impact on the ECB. However, experts are warning that European stock markets can experience a new dawn, even in such a complicated context.
Two years of low returns against the US stock markets, something seems to have changed. So far in 2025, the EuroStoxx 50 has appreciated 4.98% while the S&P 500 has barely done the same by 2.18%. Analysts are talking about three main arguments that justify the new hopes that are being generated about European stock markets. However, always highlighting that there are very present dangers that are leading more and more experts to believe that this ‘new dawn’ will be frustrated by the great risks that arise or, at least, will have to be postponed.
Europe’s ‘old evils’
BCA Research comments that in Europe there are structural problems that will prevent it from unleashing its full potential (compared to the US) no matter what it does. In that sense, they highlight a “productivity gap” that is being the key. However, being so far behind there is a lot of room for maneuver. “Investors underestimate European assets because they extrapolate the region’s productivity and profitability results compared to the United States.” Specifying the problem, they insist that there is “low productivity, low investment rates in intangible assets, lack of innovation and a dying German economic model.” Regarding the latter, they highlight the fact that higher energy costs and lower foreign demand are destroying the German model based on exports. Not to mention the high fiscal deficits of countries like France and a weakened EU economy, with GDP growing at only 0.9% compared to 3.1% in the US and 1.6% in the OECD average.
This has manifested itself so far in a very low valuation regarding the US. Clement Inbona, fund manager at La Financière de l’Échiquier (LFDE) comments in his latest report that “The valuation gap between US and European equities has never been wider. European equities are trading at a discount of around 40%.” In short, an investor is willing to pay US stocks at $22.5 for $1 in earnings over the next year, while a European-listed company would cost an average of only $13.5.”
And it’s not just that this discount offers opportunities in itself. BCA Research believes that the burden caused by Trump’s tariff threat and the structural problems in the region could trigger increases, as they are already incorporated into its price. “A new hope is emerging, driven by political changes in Germany, deleveraging and easing of austerity“. Although “their shares are quoted at the tariff risk premium, they are not taking into account the possible European response, greater integration at a global level.” In that sense, the firm’s analysts see a powerful “cyclical revaluation after a liquidation in the short term”.
In any case, he points out that “in the short term, many risks remain; European stocks and currencies still face several more difficult months. The threat of tariffs is affecting European capital spending and global.” This combination harms European stocks that are “highly leveraged in the global industrial cycle.” In that sense, they believe that Europe, at least in the short term, will not be able to assert the arguments it has to revalue itself clearly and that the S&P 500 will continue to prevail clearly. This is why other analysts speak directly that the problems that the European economy is going through could end up tipping the balance and that complicated months could come.
The euro, tariffs and the results
Europe (and particularly European companies) was having a big problem: exports. Foreign sales of goods from the eurozone to the rest of the world in November 2024 were 248.3 billion euros, a decrease of 1.6% compared to its 2023 figures. This, added to the poor health of the economy of the old continent, with much softer growth, has led to more disappointing business results. According to Goldman Sachs figures, in 2024 the results will barely mark a 2% growth in profits, while tariffs can subtract up to 9 percentage points by 2026. This contrasts with a powerful profit growth in the US of 11.9% .
However, the arrival of Trump to the White House could alleviate this problem through the currency and make the activity of the old continent take off through its companies. The latest Bank of America report says that Earnings expectations have been revised upward by 1.5% due to this reason. “The weakness of the euro, banks and energy are being key.” Of course, they see EPS falling 8% so far this year due, especially, to “a substantial reduction in the earnings per share of the pharmaceutical industry.” The Bloomberg consensus speaks of sales falling by 5% in the coming months and profits of 4.66%.
“For every 10% fall of the euro against the dollar, the profits of European firms rise by 2.5 percentage points”
The euro has already fallen 7% since September 2025 against the greenback, now exchanging for 1.03 dollars. This has led many to speak directly about parity. In any case, everyone seems to agree that the strength of the dollar, whether it continues to strengthen or not, is not going anywhere for now. Chris Turner, an analyst at ING, explains that “the strength of the US economy, Trump’s measures and an aggressive Fed will continue to keep the currency high.”
In that sense, Capital Economics points out that this generates “a particularly good performance for stocks, as it supports profit expectations for European companies,” which can now boost their sales thanks to the currency effect. According to Goldman Sachs, for every 10% drop in the euro against the dollar, the profits of European companies directly improve by 2.5 points percentages.
All this added to the fact that Trump seems not to put Europe as much in focus for his tariffs compared to other actors such as Mexico and Canada, for which he already has confirmed a 25% taxor China. In that sense, the latest Bank of America survey of investors (in which 182 fund managers with 513 billion in assets participated) specified that they expect a powerful rotation from one side of the Atlantic to the other. “The allocation to European equities soared to a 1% overweight from a 22% underweight, the largest increase to exposure in the region in more than 25 years.” “If concerns about tariffs turn out to be unfounded, investors will move.” Consequently, markets like the European one, which have been left far behind, will “catch up.”
The Silk Road… by Louis Vuitton
To this we must add a powerful awakening of illusions regarding the great market for many European companies: China. “Some positive news from China The prospects for European companies have improved, given its exposure to the Chinese economy,” they comment from Capital Economics. At a macro level, the latest GDP data from the Asian country stood out, meeting expectations with a growth of 5% in 2024, dispelling fears of a greater slowdown (in 2023 it grew 5.2%).
These news are not just isolated data, they have already landed on the balance sheets of some of the most exposed European companies. The luxury sector, which experienced a real drain last year as the Chinese slowdown promised to hamper the growth of its main business and promise for the future, is rising strongly in recent weeks. Specifically, the owners of Cartier, Richemont, announced sales that skyrocketed to 6.2 billion euros thanks to the fact that the drop in China was barely 7% (much smaller than expected) and was able to compensate for it with other markets.
This situation has filled with euphoria a sector that represents 4% of the total Stoxx and that represents close to 17% of the entire capitalization of the EuroStoxx 50. Only LVMH, Louis Vuitton’s parent company, accounts for 5% of the index. The sector as a whole has soared 21% from its November lows and 15% since December. Highlighting an increase since Richemont presented these figures until now with an advance of 8.69% since last Wednesday.
This is not just a question of European luxury, there are many sectors that have a great exposure to China and the automotive sector stands out, for which China represented 21% of its turnover, according to data from the European Commission. In this way, it is the main market compared to the US (20%) and the United Kingdom (13%). At a general level, the Asian giant is the third largest market in the EU in terms of exports with 8.8%.
They will end up giving in to problems
In any case, these three advantages: the favorable wind from the US, the undervaluation and the Chinese awakening, are arguments that may have problems maintaining the good pace of Europe in the coming months. In fact, all Bloomberg analysts consider that the EuroStoxx 50 barely has any room for revaluation and only gives it a potential of 1.6%. From Capital Economics they agree that the margin is limited given that “China’s recovery could be short-lived duration given that it does not address structural problems but is based on economic stimuli.
For their part, the US tariffs will have a double effect, they will harm China, thus hindering this engine of European companies as well, but they can also destroy the optimism that is already present that Europe avoid the harshest impact of the trade war. “Although there are no direct tariffs on Europe, universal tariffs will affect the majority of stock markets outside the US this year, just as they did in 2018 when the trade war occurred.” All this while AI continues to have an important performance that will continue to prevent the S&P 500 from being surpassed in growth, something that has been able to happen so far this year.
In summary, Europe is now experiencing a good moment, where opportunities abound and more and more investors and analysts detect the tailwinds that are accumulating in the stock markets of Madrid, Paris, Milan or Frankfurt. However, these come at a time of fragility in which the margin is getting narrower. With the new Trump era now underway, eyes are now returning to the old continent and it remains to be seen if they can finally take advantage of this context or if all these factors will finally end up imposing themselves and preventing the “new dawn” that can illuminate European equities.
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