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(Bloomberg) -- The “easy gains” are over for European stocks, with the market now fairly priced after this year’s sharp rally, according to Barclays Plc strategists.
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The region’s “Trump risk premium” — the threat of tariffs that has weighed on prices — has now largely dissipated, and equities will need improving economic growth and lower interest rates to achieve higher valuations, strategists led by Emmanuel Cau wrote in a note.
European shares have rallied in 2025 after one of their worst years relative to US peers. Cheaper valuations have sparked a rotation away from America at a time when regional corporate earnings are holding up.
Investors are betting Germany’s election result could lead to fiscal stimulus and bolster the region’s economic recovery, while the possibility of a cease-fire in Ukraine has also lifted the mood. Meanwhile, Barclays’ Cau said the market was hoping for a softer US stance on trade.
The MSCI Europe index is up 10% this year, more than double the gain of the S&P 500. Corporate earnings have also held up, lifting the gauge’s price-to-earnings ratio to about 15 from 13.5 at the end of last year.
Some of the valuation gains, particularly in sectors such as banks and telecoms, were also due to “self help,” such as a focus on shareholder returns and capital discipline, Cau said. MSCI Europe members have already unveiled €62 billion in repurchase plans so far in 2025, far exceeding last year’s €51 billion in the same period, according to a Bloomberg Intelligence tracker.
Cau said it was possible for valuations to remain higher than the long-term average. “But with so many variables (and risks) still up in the air, we wait for confirmation on some of the positives to revise our target higher,” he said.
Meanwhile, strategists at Citigroup Inc. said that recent inflows into European equities bode well for further gains. In the past, the MSCI Europe has advanced about 4% on average in a quarter following a sustained return of flows, the team including Mihir Tirodkar and Beata Manthey wrote in a note.
--With assistance from Sagarika Jaisinghani.
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