Why investors are moving back into European stocks

For the first time in almost a decade, European stocks are outperforming their US counterparts, marking a shift in global investor sentiment. There are two main reasons for this…

The Stoxx Europe 600 has surged 5.6% since Donald Trump re-entered the White House. Pic via Getty Images

For the first time in almost a decade, European stocks are outperforming their US counterparts, marking a dramatic shift in global investor sentiment.

The Stoxx Europe 600 has surged 5.6% since Donald Trump re-entered the White House, far outpacing the S&P 500’s 2.5% gain and the Nasdaq Composite’s 2.2% rise.

This strong start to the year, the best for European equities since the late 1980s, is forcing investors to reassess a region that has long been overshadowed by the dominant US market.

Two key developments are behind this resurgence: Trump’s decision not to immediately escalate tariffs against the EU and the renewed possibility of peace talks in Ukraine.

The worst-case scenario of an aggressive trade war between Washington and Brussels – a major overhang for European equities – has, at least for now, been avoided. This has lifted a major source of uncertainty, allowing investors to focus on the region’s improving fundamentals rather than being preoccupied with geopolitical risk.

At the same time, European Central Bank rate cuts are adding further fuel to the rally. Unlike the US Federal Reserve, which remains cautious about easing too aggressively, the ECB is moving decisively to stimulate growth.

Lower rates mean cheaper borrowing costs for businesses and consumers, providing much-needed support to an economy that has been flirting with stagnation for years. This policy divergence is now making European assets relatively more attractive.

The valuation gap

For years, investors have favoured US stocks, particularly tech giants, leaving European equities looking relatively cheap by comparison. Even after this recent rally, European stocks trade at a significant discount to their US peers.

The valuation gap has reached levels that are difficult to justify, especially given the improving macroeconomic backdrop in the Eurozone.

With high-quality European companies trading at multiples far below their US counterparts, global investors are increasingly realising that they can no longer afford to ignore the opportunity. The recent rally suggests that funds are flowing back into the region, a trend that could accelerate as confidence builds.

A rotation

For the last decade, global portfolios have been dominated by US tech stocks. But with interest rates still relatively high in the US and regulatory scrutiny mounting, some investors are questioning whether the era of US tech dominance is set to cool.

The rally in European equities suggests a strategic reallocation is underway. Investors are looking for opportunities beyond the crowded trades of the past, and Europe, with its lower valuations and central bank support, is an increasingly compelling destination.

Sceptics will argue that Europe’s rally is temporary and that US markets will reassert their dominance once rate cuts arrive in America.

But this view overlooks a fundamental shift in market conditions. European equities have historically been hamstrung by economic stagnation, political uncertainty, and a lack of structural growth.

Today, those headwinds are easing, and Europe is once again on the radar of global investors.

As the ECB continues to ease policy and political risks abate, European markets have the potential to extend their outperformance. Investors who have long dismissed the region as a value trap are now being forced to reconsider.

The question is no longer whether European stocks can rise – it’s whether investors can afford to stay on the sidelines as the region appears to be staging a comeback.

Nigel Green, is the group CEO and founder of deVere Group, an independent global financial consultancy.

Originally published as Why investors are moving back into European stocks