In This Article:
Arne Dedert / picture alliance via Getty Images
Key Takeaways
-
European equities have this year outperformed U.S. stocks by the widest margin since 2000, according to a recent report from Morgan Stanley.
-
European stocks have rallied on hopes that increased defense spending and an end to the war in Ukraine could stimulate growth.
-
Recent economic indicators have pointed to a stabilizing European economy that could get more support this year from interest-rate cuts.
European stocks are shining after more than a decade of lackluster performance.
The German DAX index has risen nearly 17% so far this year. France’s CAC 40 has gained 11.5% and Britain’s FTSE 100 has advanced nearly 9%. Meanwhile, the S&P 500 is up less than 1% since the start of the year. European equities haven't outperformed U.S. stocks by this much since 2000, according to a recent Morgan Stanley report.
European stocks entered 2025 looking downright cheap, and a gap remains even after the latest run higher. The group's recent forward price-to-earnings ratio, as measured by the MCSI Europe Index, of just 14x is well below American stocks' 22x, the widest valuation gap in decades. That may have encouraged investors, wary of America's stock valuations and uncertain economic outlook, to turn to Europe for the possibility of better returns.
Defense, Ukraine Spending Could Stimulate European Economy
It's likely more than just American stock valuations that have investors looking to Europe, argue Morgan Stanley analysts.
The prospect that the war in Ukraine might soon come to an end after more than three years of fighting may also be driving European shares higher. The World Bank has estimated reconstruction in Ukraine could require nearly $500 billion in construction spending over the next decade. And an end to the war could lead to the resumption of natural gas flows from Russia, lowering European energy costs and relieving some inflation.
The Trump administration’s stance toward America’s fellow NATO members, which the president has accused of free-loading, has pushed European leaders to consider boosting their own defense spending, lifting defense stocks in recent days.
Europe’s economy appears to be turning a corner after years of sluggish growth. Purchasing manager index (PMI) readings have improved recently, suggesting the manufacturing and services sectors are on the mend. Analysts are increasingly optimistic about corporate earnings growth on the continent, according to Morgan Stanley. And European M&A activity rose more than 20% year-over-year in the first two months of 2025, LSEG Data & Analytics said Monday.