Quick shot: European equities outperforming expectations at the start of 2025

European equities have taken many by surprise as a dark horse in the early days of 2025. At the start of the year, the outlook for Europe wasn't exactly glowing. Growth expectations had cooled, the Russia-Ukraine conflict continued and the threat of U.S. tariffs loomed. Yet since the year began, the Euro Stoxx 50 (Europe’s "blue-chip" equity index) has delivered an impressive 14.4% total return (in USD), outpacing the S&P 500's 4.1% return (as of February 18, 2025).

So, what's behind this unexpected outperformance? Recent economic data has come in above expectations from manufacturing activity to business expectations. This has helped Europe's earnings season kick off on a strong note. Companies in the luxury and technology sectors have exceeded market expectations, leading to noticeable price movements. On the sentiment front, the mood has improved. There's talk of potential negotiations in the Russia-Ukraine conflict. And while U.S. tariffs have been a hot topic, they've been delayed, suggesting the possibility of a deal before they take effect. These incremental improvements in sentiment are reflected in the recent valuation expansion of the Euro Stoxx 50.

For exposure to Europe, we prefer the industrials, technology and luxury sectors. Industrials could benefit from the artificial intelligence (AI) wave and its connection to data centers. Plus, if Europe ramps up defense spending, industrials could be well-positioned. In technology, we anticipate a recovery in the semiconductor manufacturing equipment space. Software companies could continue to benefit from the AI wave and increased cloud migration. Finally, after a period of normalization, the luxury sector is showing better-than-expected results: The U.S. consumer is strong and China is becoming less of a detractor compared to last year.

While many of the risks Europe faced at the beginning of the year remain, the year-to-date outperformance underscores the advantages of having internationally diversified equity exposure. By spreading investments across geographies, investors can capture corporate profits from all corners of the globe and lessen reliance on any individual country’s growth engine.

Past performance is no guarantee of future results. It is not possible to invest directly in an index.

All market and economic data as of 02/18/25 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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