After 2 years of US Exceptionalism, Europe shares +10% YTD vs. +4% for the US
For the final couple years, the story for equities globally has been considered one of “US Exceptionalism,” the place US shares have considerably outperformed different markets, largely due to the US-based (and Nasdaq-listed) Magazine 7.
Over 2023 and 2024, US equities gained +59% – greater than double Europe’s +24% acquire (each measured by the MSCIindices of huge and mid caps).
To start out 2025, although, the US hasn’t been so distinctive.
In truth, it’s Europe that’s doubling up the US, with the MSCI Europe up +10% (chart beneath, gold line), in comparison with +4% for the US (blue line).
Europe’s lead is broad primarily based, beating the US throughout 7 of 11 sectors, tied in 2 extra
And it’s not only one factor driving it. If we have a look at returns this 12 months by sector (chart beneath), Europe (gold bars) is thrashing the US (blue bars) in 7 of 11 sectors, they usually’re basically tied in two extra (Supplies and Actual Property).
So Europe’s management is broad primarily based.
AI publicity, higher-for-longer charges, and “costly” valuations larger headwinds for US
There are a couple of completely different causes the US has lagged Europe:
- US far more uncovered to AI. Tech is 40% of the MSCI USA in comparison with simply 10% for Europe. For the final 2 years, this favored the US, with AI optimism serving to the Magazine 7 acquire +156%. However the Magazine 7 is flat this 12 months, partially as a result of DeepSeek’s low value, excessive efficiency mannequin tempered that AI optimism (and the knowledge of Large Tech’s deliberate $300bn spending on AI this 12 months). Europe, although, is tilted extra in direction of Financials, Well being Care, and Industrials.
- US dealing with higher-for-longer charges as Europe cuts. Markets are solely pricing 40bps in Fed cuts this 12 months, in comparison with 120bps from the European Central Financial institution (together with the 25bps reduce they already did). So the European financial system is predicted to get extra of a lift from fee cuts.
- Europe “low-cost” relative to US. The US’s Value/Earnings valuation ratio is over 22 – near file highs throughout Covid and the Dotcom bubble – whereas Europe’s PE is simply over 14 – near its 20-year common and about two-thirds the US’s PE. So Europe shares are comparatively “low-cost” in comparison with the US. Plus, greater charges (#2) make it more durable to maintain excessive PEs since greater borrowing prices make future earnings more durable to comprehend.
- European earnings recession over. After seeing earnings fall -2% in 2024, the MSCI Europe is predicted to see earnings rise +7% this 12 months. Although that trails the US’s projected +13% earnings acquire.
Nonetheless, outdoors of the dimming of AI optimism, most of those components had been already in place to start out the 12 months.
So, it’s extra a narrative of Europe recovering (after gaining simply +2% final 12 months) than the US slowing down. In any case, the MSCI USA is slightly below its all-time excessive (set in January), and a +4.3% acquire in six weeks isn’t too dangerous.
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