The Euro Stoxx 50 index is at an all-time high. At the same time, the European economy remains difficult. Consumer morale and investment are at half-mast, and economic activity is moving slowly. Discontent and political instability are affecting a growing number of countries. How can such a dichotomy be explained?
Europe has cheaper markets
The main reason for the strong performance of European equities in 2025 is that our stock markets are cheaper than those in the United States.
The euphoria around artificial intelligence and technology has pushed US valuations to very high levels. Initially, this high valuation seemed justified: the tech companies that serve as the locomotive of the American stock market are certainly stingy with dividends, but capable of generating very high profits, which could justify investor confidence.
But the increase is now being driven by a narrower group of companies, especially those related to artificial intelligence. And for them, the question of how they will generate profits in the future remains unanswered.
This makes investors doubt and makes them look for cheaper assets elsewhere. If Europe is fashionable, it is first and foremost because they find assets that are generally cheaper, such as the financial sector, one of the big winners of 2025.
Paradox changes in most countries
Added to this is a return of hope. Europe promises progress on several fronts.
The Draghi report has raised a series of problems that Brussels is trying to address. The pivot to European defence, with the promise of additional funds for armaments, has been widely celebrated by the defence sector.
Germany has finally left behind years of budgetary obsession and is embarking on a wave of public investment the country has not seen since reunification.
The Italian economy is doing better. Driven by the wave of reforms implemented by Mario Draghi and which continued under Georgia Meloni, economic activity remains sluggish, but public finances are improving significantly, strengthening investor confidence in the country.
A special situation for Spain and Portugal
The economies of the Iberian Peninsula are doing well, a boom that multiple factors can explain: they benefit from an EU derogation that allows them to cap the price of gas used for electricity production.
So, Portugal and Spain have much cheaper energy than the rest of the continent, which naturally benefits the industry. In both countries, industrial production was growing by more than 3% per year in August. At the same time, Germany experienced a fall of more than 4%.
In addition to this industrial counter-cycle, there are other factors, such as the tourism sector, which is still buoyant, or impressive population growth.
Credit relief and employment are good news
Beyond the great malaise affecting the economies of central Europe, we can observe here and there a Europe that is doing better, likely to drive growth forward.
In the immediate future, the fact that the labour market remains very tight despite the sluggish economic situation is clearly good news for households, which are still able to afford to consume. Cheaper credit after the European Central Bank's rate cuts should help support their spending and investment.
But not everything is rosy
However, we have to face the facts. Still stuck in the immense regulatory spider's web that it has woven for itself, Europe is hardly moving forward.
Public finances have deteriorated considerably, and the temptation to further increase the tax burden on citizens and businesses does not help.
The latter are struggling to remain competitive, and some are even considering moving to the United States, where they would benefit from a more welcoming environment.
One year after the publication of the Draghi report, which set out a roadmap for Europe to regain its competitiveness, about 1/10 of the proposed measures have been implemented, mainly in the common defence sector, amid significant disagreements among the leading players.
On the other hand, the idea of creating a technological base that could compete with the United States (or China) has made little progress, nor has the banking union.
As for reducing bureaucracy, the few European advances will hardly compete with the measures announced by the White House since Trump's arrival. And unlike the United States, there has been no tax reform worthy of the name that is favourable to consumers and businesses.
Taxes and regulatory issues on the way
There is also a downside to the cheap nature of European stock markets. Many European technology players have prices comparable to those of the American giants.
Therefore, if European markets are still relatively cheap as a whole, it is because the other sectors, less fashionable, are heavily penalised by a sluggish market, but also because they face levels of taxation and/or regulatory constraints that have nothing to do with those of their American competitors.
Two concrete examples: the US energy sector (MSCI USA Energy) is trading with a price-to-earnings ratio of around 17x. Its European equivalent is at 11x. The banking index is trading at 15x in the United States. Its European equivalent is at 10x. For these sectors, and many others, Europe is no longer a land of investment.
In the long term, the US is still a better option
Despite lower prices than those of US stock markets, investing in European equities as a whole is not the best strategy in our view. See our asset allocation strategy:
In the long term, it is more profitable for an investor to position themselves in the USA than in Europe, even if Europe may experience more dynamic stock market phases at times.
We favour exposure to the eurozone through individual equities, which are likely to do well in this challenging environment.
The Euro Stoxx 50 index of the European stock exchange
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Driven by tech, defence and banks, the flagship index of European markets is reaching record highs. Overall, cheaper than its American cousins, it nevertheless hides significant challenges.