European stocks outperformed Wall Street in the first six weeks of 2025, marking their best performance in a decade. However, the prospect of overcoming long-standing structural challenges remains uncertain. Investors are flocking to European equities due to valuation gaps, eyeing potential catalysts for a sustained rally. Fund inflows surged in January, with European benchmarks hitting record highs, fueled by hopes for improved fiscal policies in Germany post-election, easing tensions in Ukraine, and potential tariff reductions by the U.S.
The recent shift in market dynamics, with AI megacaps on Wall Street encountering competition from Chinese counterparts, hints at a possible broader market leadership shift towards neglected sectors where Europe excels. Major European stock markets in cities like Frankfurt, Zurich, London, Milan, and Paris have seen gains, propelling the STOXX 600 up by over 5.5%, surpassing the S&P 500's 2.7% increase.
Marc Halperin, a portfolio manager at Edmond de Rothschild AM, is optimistic about Europe's potential, noting the current investor underweight trend. He anticipates positive developments like leading indicator rebounds, potential interest rate adjustments, and geopolitical factors shaping market outcomes.
Research from SentimenTrader suggests a strong market rally based on technical indicators, forecasting potential gains in the coming months. Nordea strategist Hertta Alava also expects further European outperformance due to attractive valuations and accelerating earnings growth, narrowing the gap with U.S. counterparts. Despite the optimistic outlook, entrenched structural challenges persist in Europe, including energy dependencies, governance issues, market fragmentation, limited population growth, and lower tech investments.
European earnings are forecasted to show a significant uptick in 2025, contrasting with slower but higher expected U.S. earnings growth. While Europe's recent stock market resurgence is encouraging, historical trends caution against overlooking Wall Street's enduring dominance.