European stocks tipped to outperform the concentrated US market, says Deutsche Bank

Deutsche Bank head of European equity and cross asset strategy Maximilian Uleer.

The US sharemarket has been the standout of the past two years but Deutsche Bank foresees various triggers for a “tactical outperformance” by European stocks in 2025.

According to Deutsche Bank’s head of European equity and cross asset strategy, Maximilian Uleer, the current weakness of investor sentiment in Europe at a time of improving macro data, lower rates, improving earnings and potential upside surprises from China, creates a buying opportunity.

The US market has soared in recent years, leading other developed markets by about 60 per cent since August thanks to US economic exceptionalism, interest rate cuts, the AI boom, and optimism about US outlook under president-elect Donald Trump.

But no doubt there’s some hubris about US stocks after the S&P 500 rose about 50 per cent in the past two years. It has been narrowly driven by a 124 per cent rise in the “Magnificent Seven” tech stocks; market darling Nvidia has soared 410 per cent in that time.

The AI boom is just getting started but the massive concentration of global stockmarket capitalisation in the US is a concern.

As of last Friday’s close the US had a total market capitalisation of $US52.72 trillion.

The top 22 companies accounted for almost 50 per cent. The top 10 were almost 39 per cent, the Magnificent Seven were about 33 per cent and the top three stocks were just over 19 per cent of the total.

A chart released by The Kobeissi Letter recently showed that the top 10 stocks in the S&P 500 were almost 800 times bigger than the 75th biggest stock, a multiple that exceeds that of the Covid pandemic, the GFC, the dot.com bubble, the Nifty Fifty Bubble and the Great Depression.

After doubling in the past 4.5 years, the US market is now 50 per cent more concentrated than it was in 2001. To put that in perspective, China, Hong Kong and Europe combined are now worth about 50 per cent less than the US, and the Magnificent Seven stocks are now larger than the entire European market.

Is all this concentration of value in the US justified?

US stocks have a massive first-mover advantage in the AI boom and have left others in their wake.

Few countries have a leader like Donald Trump whose single-minded focus is to foster domestic economic growth and generally promote the interests of his own country.

The AI boom and the potential for sky-high valuations in the Magnificent Seven gives the US market enormous potential to “climb the wall of worry” this year, especially while interest rates are falling.

But after a hawkish pivot by the US Federal Reserve last month, the US 10-year bond yield has soared to eight-month highs of around 4.7 per cent, even as US economic surprises have peaked.

The correlation between US stocks and bond yields has turned negative, the S&P 500 has been unable to regain its pre-FOMC meeting level and Nvidia fell despite an upbeat CEO presentation.

Expectations of US tariff increases and tax cuts after Trump’s inauguration on January 20 are a plus for US companies relative to offshore companies. However Trump’s policies may cause inflation and a further rise in bond yields, potentially triggering a fall in stocks.

In that backdrop and taking account of relative valuations, Deutsche Bank’s cross asset strategy team this week told clients to go overweight European against US stocks.

“We are more constructive on equities than consensus for the third year in a row,” Mr Uleer said. “However, this year, our positive view on European equities stands out.

“While we also expect US equities to do well this year, we see various triggers for a tactical outperformance of European equities in 2025.”

He said the US election and Donald Trump’s revival have been the main factors affecting the performance of European stocks relative to the US market.

Since the start of August the S&P 500 has risen more than 7 per cent while the Euro Stoxx 600 has fallen almost 1 per cent.

“In our view, the election results have been fully priced in since November,” Mr Uleer said.

“At the same time, political uncertainty has come down in Europe and the German snap elections are likely to be a positive catalyst for sentiment towards Europe in the March quarter.

“And while the US economy remains strong, he said markets have “become accustomed to ‘US exceptionalism’ leaving less room for upside surprises”.

After US non-manufacturing ISM data came in hotter than expected but the inflation index also rose to its highest point since early 2023, bulls will hope for a “Goldilocks” non-farm payrolls report on Friday. The US market is due to be closed on Thursday in observance of former president Jimmy Carter’s passing.

Meanwhile, Mr Uleer argued that economic surprises in the eurozone would turn up with retail sales growing strongly and manufacturing PMIs to rebound after staying below the 50 “contraction” mark for the longest period on record.

The UK 10-year Gilt yield soared 11 basis points to 4.82 per cent on Wednesday, its highest point since 2008, spilling over to German 10-year bond yields which rose 7 basis points to 2.54 per cent.

But Mr Uleer foresees relatively lower bond yields in Europe as a plus for stocks valuations.

He also expected December quarter earnings from European companies to significantly beat expectations.

The bullish US market on the other hand might struggle to beat expectations.

The relative bullishness of US earnings estimates fits with consensus expectations of an 8 per cent rise in the S&P 500 and a 4 per cent rise in European stocks this year.

And with its relatively stronger links to China, he said the eurozone was well positioned to benefit from any significant stimulus announcements from China’s National People’s Congress in March.