In euro terms, European equities have outperformed significantly this year, with the MSCI Europe index posting a 9% gain while the S&P 500, in the same currency terms, is down by the same amount. That’s a sharp reversal in relative performance seen in recent years with the US outperforming consistently. Could it be the start of something more sustained?
Much of Europe’s weak economic performance over the past decade has stemmed from tight constraints on fiscal spending, conservative monetary policy, and rigid regulation. In contrast, the US has pursued expansionary fiscal measures with gusto: tax cuts, direct stimulus payments, and a more flexible approach to borrowing. Over the past ten years, US public debt has risen by 17 percentage points of GDP. Europe, on the other hand, has cut debt levels by five points.
Likewise, Europe’s monetary policy was slow to adapt post-pandemic. The US economy weathered rate hikes with less disruption thanks to its prevalence of long-term fixed-rate mortgages. In Europe, where borrowers rely more heavily on variable-rate loans from local banks, rising interest rates hit harder and faster. Financial conditions in the euro area and the UK have recently been more restrictive than at any time in the past 15 years.
However, there are signs that this dynamic is changing. Fiscal stimulus is starting to flow. Germany’s €500 billion infrastructure plan alone equates to a 1% annual GDP growth rate boost, every year, for the next decade.
Rate cuts now look likely in the near term too. Easing financial conditions could act as a catalyst for lending and investment, reversing the drag seen in recent years in Europe.
Europe has also seen tighter regulatory oversight than other regions, especially on climate-related initiatives. These goals are important, but the pace and cost of compliance have weighed on corporate margins and slowed business activity.
Now, some of that pressure is being rebalanced. Environmental regulations are being reviewed, with certain rules postponed or softened to give industries more breathing room. This could provide an additional tailwind to European businesses, particularly in energy-intensive sectors, and support broader economic recovery.
One reason Europe has lagged the US in equity performance is its limited exposure to high-growth technology firms. European indices are more heavily weighted toward financials, industrials, and traditional consumer sectors, which struggled during the pandemic and failed to participate in the AI-fuelled stock rallies that benefitted US mega-cap tech.
But sector leadership doesn’t stay static forever. If the AI story in the US takes longer to deliver tangible returns, and if markets start demanding more evidence of profitability from tech giants, the tide could turn. The last time Europe outpaced US markets was between 2000 and 2009, during and after the bursting of the original dot-com bubble.
European equities also remain far cheaper than their US counterparts, trading at a meaningful discount. If global investors start rotating away from concentrated US exposure, Europe could be a key beneficiary.
Geopolitics can also boost confidence. The adversarial tone of US foreign policy under Trump may be prompting greater cohesion within Europe. Investment in defence is rising, and political unity is becoming more of a priority. A resolution or de-escalation in the Ukraine conflict would also provide a lift by reducing energy prices, improving sentiment, and encouraging private sector activity.
Goldman Sachs estimates that a peace agreement could boost eurozone GDP by up to 0.5%, primarily through lower gas prices and improved market confidence.
Not all of these outcomes are guaranteed. Much depends on policy follow-through, geopolitical developments, and how markets digest new information. Still, taken together, they represent a credible roadmap for a more upbeat outlook where Europe plays a more central role in global growth than it has in recent memory.
For investors, the message is clear: assumptions built on the last decade may no longer hold. It might be time to reassess regional exposures and consider whether the future of global growth looks more balanced than the recent past would suggest.
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