Knowables: Europe’s Equity Resurgence 04.18.25

A trend worth highlighting is evolving among European equities, as evidenced by the strong performance of the MSCI Europe Index, which gained 8.6% during Q1. Europe is significantly outpacing U.S. benchmarks such as the S&P 500 and NASDAQ, both of which experienced modest declines. For many investors, this shift has sparked new interest in the opportunities global markets can provide. In this memo, we take a closer look at the key drivers behind Europe’s equity resurgence and explore why international diversification may play a more important role in your portfolio moving forward.

Policy Support Is Fueling Growth

After years of relatively restrained fiscal policy, European governments have begun actively stimulating their economies. Germany announced a major infrastructure and technology investment program in early 2025. The European Union also rolled out funding initiatives to support energy transition and innovation, with an eye toward boosting long-term competitiveness.

These programs have come at a time when inflation across the eurozone has moderated, allowing central banks to pause or even consider reducing interest rates. The combination of fiscal support and less aggressive monetary tightening has improved the economic outlook and helped lift investor sentiment across the region.

Why It Matters: Companies operating in more favorable policy environments often see better earnings potential, which in turn supports higher equity valuations.

Attractive Valuations Compared to the U.S.

Entering 2025, many European equities were trading at a discount to their historical averages and significantly lower than U.S. valuations. This created a compelling opportunity for investors looking for relative value, especially after years of U.S. tech-driven market leadership.

European stocks, especially in sectors like industrials, consumer staples, and financials, began to draw investor attention not only for their earnings potential but also for the margin of safety their lower prices offered.

Why It Matters: Investing in lower-valued markets with stable fundamentals can increase long-term return potential, particularly if sentiment shifts or growth prospects improve.

Sector Strength in a Changing Market Cycle

One of the reasons Europe is standing out this year is its sector composition. European markets are more heavily weighted toward traditional industries—like banks, energy companies, and manufacturers—that tend to perform well in late-stage or mature economic cycles.

By contrast, U.S. markets have been more exposed to high-growth sectors such as technology and biotech, which have faced recent headwinds from tightening financial conditions and regulatory uncertainty.

Why It Matters: Different markets offer different sector exposures. Having a global portfolio can help balance cyclical risks and enhance your ability to capture gains across economic environments.

Currency Stability and Global Investment Flows

One common concern with international investing is currency risk. Fortunately, the euro has remained relatively stable against the U.S. dollar in early 2025. This has preserved gains for U.S.-based investors and minimized the impact of foreign exchange on performance.

Moreover, the strength in European equity markets has attracted additional capital flows from around the world, reinforcing the positive trend and providing further support to stock prices.

Why It Matters: Currency stability can help reduce volatility in international holdings and makes it easier for investors to capture the full benefit of strong market performance abroad.

Bottom Line: What This Means for Your Portfolio

Europe’s strong start to 2025 is a timely reminder of the value global diversification can bring to a long-term investment strategy. While U.S. markets remain a cornerstone for most portfolios, incorporating international exposure—especially in regions benefiting from favorable trends—can offer new sources of return and help reduce concentration risk.

As always, your portfolio is designed with your goals, time horizon, and risk tolerance in mind. If you have questions about your international exposure or want to explore opportunities in today’s evolving market landscape, we’re here to help.

Please don’t hesitate to reach out to our team to discuss more.