Europe finds itself “in the midst of a perfect storm”, says The Economist. Growth faces “stiff headwinds” and electorates are “routinely tossing their leaders overboard”. Donald Trump is planning tariffs. Europe’s catalogue of problems is long, says Simon Nixon in the Financial Times. Growth has “stalled”, regulation is “burdensome”, energy prices are “high” and manufacturing is under pressure from China.
Yet with so much pessimism around, there is a “very low bar” for positive surprises that could boost stocks. So what might go right? Unexpectedly large interest-rate cuts by the European Central Bank (ECB) would help. On the political front, an end to the war in Ukraine could improve sentiment. Finally, German elites are slowly coming around to the idea that the country must reform its self-defeating “debt brake”, which has long been an obstacle to higher growth.
A large Chinese stimulus in 2025 would also boost European equities, says Frédérique Carrier of RBC Wealth Management. The Middle Kingdom is a “key export destination” for the continent’s goods.
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A strong start to 2025 for European stocks
Economic sentiment is “on the floor” in Germany, yet European stocks have enjoyed a surprisingly strong start to the year, says John Authers on Bloomberg. The DAX index is up 7% already this year, with France’s CAC 40 not far behind. Bank of America’s latest monthly survey shows global fund managers have raised their “European weighting… by the most in any month since 2015”. It seems the continent’s stocks have simply become too cheap to ignore, giving a substantial “margin of safety” for investors. As Andrew Lapthorne of Société Générale notes, MSCI Europe is trading at a record 40% discount to US stocks on a forward price/earnings basis.
Germany has been in recession for the past two years, yet the country’s stocks have been the best-performing major European market over that period, says Pierre Briançon for Breakingviews. The blue chips of the DAX are large multinationals geared to global growth. Only a fifth of the DAX’s sales actually originate in the home German market, with 24% from America and 18% from China.
But a looming tariff war with Trump could soon choke off that release valve. Escaping Germany’s “grim economic reality” is becoming harder and harder for investors. DAX earnings look to have fallen by 9% for the full year 2024, according to a note from Deutsche Bank, with declines driven mainly by plummeting car-industry earnings.
Nevertheless, earnings look set to enjoy a “strong recovery” in 2025, with 11% year-on-year growth powered by technology, industrial and financial shares. Analysts’ year-end target for the DAX is 23,000 points, a further 7% gain from the current level.
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