#MacroFriday: European Equities Top the Charts in 2025

European equities have climbed more than 10% since the start of the year, outpacing US equity indices—a surprising development given the region's persistent economic stagnation and geopolitical uncertainties.

Several factors have fueled this strong year-to-date performance. Historically low European equity valuations, especially in contrast to expensive US stocks, have attracted investor attention. Additionally, renewed optimism around Ukraine peace talks and the current absence of US tariffs under Trump specifically targetting Europe, have further boosted sentiment. Leading the charge are European banks, defense, and the luxury sector.

However, for this upward trend to be sustained, earnings growth must follow. So far, the rally has been driven by an expansion of multiples rather than fundamental earnings strength. Equity performance should be followed by earnings growth or vice versa. It is particularly striking that European corporate earnings are standing at the same level as before the Global Financial Crisis (GFC) nearly two decades ago.

European equities have lagged the US significantly, where stocks have quadrupled and earnings have grown 2.5 times over the same period, while European equities have shown no growth. European equity performance doubled over this period when we include dividends, still lagging US total returns significantly (> x5). For this European rally to gain momentum, earnings must eventually break out of their long-standing stagnation.