Europe’s rally: trade or trend?

European equities have outperformed the U.S. so far in 2025, with MSCI Europe up nearly 11% year-to-date versus just 1.5% for the S&P 500. That’s a notable shift, but does it change the broader investment case? 

We don’t think so. While Europe may offer a short-term trade, the U.S. remains the structurally superior market. For years, European markets have lagged, weighed down by sluggish economic growth, structural inefficiencies, and geopolitical uncertainty. But with valuations now comparatively cheap (~11.4x EV/EBITDA for MSCI Europe, versus 16.1x for the S&P 500), and with sentiment already beaten down, even a modest improvement in fundamentals could fuel further gains. 

Several catalysts could support a more constructive view: 

• Potential Ukraine de-escalation: A reduction in geopolitical risks could lower energy costs and boost business confidence.
• More fiscal spending: Germany’s recent political developments suggest a shift towards greater fiscal stimulus, which could support broader European growth.
• Monetary policy tailwinds: Unlike the U.S., where rate cuts remain uncertain, the European Central Bank has more room to ease—which could provide a potential boost to equities. 

However, despite Europe’s short-term momentum, it still lacks the key drivers that make U.S. equities dominant: 

• Earnings growth: U.S. companies continue to generate higher earnings, with the S&P 500 expected to deliver 11% earnings growth versus MSCI Europe’s 3.4%.
• Higher-quality companies: The U.S. market is home to more globally competitive, high-margin, and innovative businesses, whereas Europe’s corporate landscape is weighed down by older, lower-growth industries.
• Structural advantages: Deeper capital markets and more business-friendly policies should keep the U.S. ahead. 

While Europe offers tactical opportunities, it can’t yet overcome its long-term structural issues: lower productivity growth, geopolitical risks, and potential U.S. tariffs. Investors should consider European exposure as a trade rather than a fundamental shift away from U.S. equities. For investors, that means treating Europe as a tactical opportunity, not a core allocation shift. 

Maverick Lin contributed to this article.