After years of trailing global markets, European equities’ outperformance this year has surprised many investors. Now, many are wondering if this trend can continue or if European equities face tougher times ahead.
We believe that subdued investor sentiment in Europe, coupled with a more resilient-than-feared economy and a relatively stable political backdrop, can further propel European equities. In this article, Fisher Investments UK will review the case for European markets today, highlight the implications for style leadership and explain why we believe a globally diversified approach remains the optimal choice for long-term investors.
Why European Leadership Has Emerged
For some investors, European equity leadership is hard to comprehend. European markets have underperformed for years. Valuations remain low, and a series of negative headlines – from Russia’s continued invasion of Ukraine to stagnant growth in Germany and other regions – have weighed on sentiment. Taken together, it’s understandable some ask: how can Europe outperform in such circumstances?
At Fisher Investments UK, we see European equities’ strong start as a sign that the continent’s future is likely brighter than many currently appreciate.
Entering the year, investor sentiment in Europe was markedly negative – far more so than in the US. Although the sentiment gap has since narrowed, as investors consider the economic effects of tariffs, scepticism towards Europe remains. For equities – which move most on the difference between expectations and reality – low sentiment can lower the bar reality needs to exceed.
This dynamic, in Fisher Investments UK’s review, continues to position European equities for further upside. There are several encouraging factors stand out amidst the present political and economic backdrop.
Political Stability
One reason for optimism is the reduction in political uncertainty. Early this year, equities benefitted as uncertainty fell following Germany’s elections and the resolution of the French government’s budget battle. Whilst continued uncertainty around US tariffs should be monitored, many of the contentment’s potential political disruptions appear largely under control, for now.
Typically, equities perform well under periods of political calm, when investors can focus on economic fundamentals without the looming fear of major policy change.
Consumer and Business Strength
Another bright spot is the financial health of European consumers. Disposable income, relative to GDP, is at its highest level in over 20 years, and household balance sheets remain strong.[i]
Similarly, European companies are showing signs of vitality. Bank lending continues to recover from its 2022 trough, enabling more companies to fund new growth.[ii]
Additionally, Purchasing Managers’ Indexes (PMIs) – which indicate the likely direction of economic trends – are improving. For the services sector, which constitutes the majority of the European economy, readings have indicated expansion since early 2024.[iii] Whilst manufacturing PMIs remain contractionary, this is part of a long-standing trend and isn’t surprising to markets.
Although we don’t believe European economic indicators imply rapid growth ahead, history shows that markets don’t require rapid growth to rise.
Sentiment vs. Reality
For Fisher Investments UK, the disconnect between sentiment and economic and political drivers was crucial to European equities’ January rally. We believe this discrepancy remains a powerful tailwind that can support European outperformance in the period ahead.
A Shift in Equity Style Leadership
European equity leadership has another implication for investors – a rotation in equity style leadership. Should European equities continue to lead, value-oriented equities are likely to outpace their growth-oriented peers. This is because the European equity market is dominated by value-oriented sectors such as Industrials and Financials, which together comprise just shy of 40% of Europe’s equity market.[iv] Conversely, growth-oriented sectors such as Technology and Technology-like Communication Services represent over 40% of the US market.[v] By definition, if Europe leads, so does value. At Fisher Investments UK, we believe the same market forces driving European equity leadership are also likely to spur value’s outperformance.
Favouring a Global Approach
Whilst we believe European equities are poised to continue to lead, we think a globally diversified approach to equity investing is prudent for most long-term investors.
Investors who concentrate their portfolios too heavily in areas they expect to outperform often miss opportunities as market leadership rotates.
History shows that country leaders often become laggards over time, with no predictive pattern of past performance indicating future leadership.[vi]
Each country has a unique set of characteristics that can fall in and out of favour depending on shifts in economic circumstances, political developments and investor sentiment. Sometimes the US leads; other times, different parts of the world take the helm.
The key takeaway, in Fisher Investments UK’s review? Past performance does not guarantee future results. A globally diversified portfolio allows investors to capitalise on equity market growth wherever it materialises, particularly given the inherent rotation in market leadership.
The Road Ahead
We believe European equities’ strong rally in 2025 indicates more gains to come. The market drivers responsible for this momentum appear robust enough to sustain European markets through the remainder of this year. Additionally, with value equities likely to benefit from this trend, they are positioned to emerge as style leaders. However, we caution against overconcentration in any one region. A modest overweight towards European equities may be healthy. But at Fisher Investments UK, our view is that spreading your investments globally remains the prudent approach for long-term growth, allowing investors to take advantage of opportunities wherever they arise.
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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
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[i] Source: European Central Bank, as of 03/02/2025. Household total debt and cash, quarterly, 31/12/2002 –30/09/2024. Net debt to equity (equity and investment fund shares/units held by households), quarterly, 31/12/2002 – 30/09/2024. Disposable income as a percentage of GDP, quarterly, 31/12/2002 –30/09/2024.
[ii] Source: FactSet, European Central Bank, as of 31/01/2025. Two-quarter moving average of aggregate expected lending demand and willingness to lend from Senior Loan Officer Opinion Surveys. Lending includes commercial & industrial, mortgage and consumer (auto and unsecured), weighted by category, quarterly, 31/03/2003 – 31/12/2024.
[iii] Source: FactSet, European Central Bank, as of 31/01/2025. Europe Purchasing Managers’ Index readings for services, manufacturing and a composite of the two, seasonally adjusted, monthly, 31/01/2022 – 31/12/2024.
[iv] Source: FactSet, as of 20/03/2025. MSCI Europe sector weights, as of 28/02/2025.
[v] Source: FactSet, as of 20/03/2025. S&P 500 sector weights, as of 28/02/2025.
[vi] Source: FactSet, as of 02/01/2025. Total Returns of the top performers of the 23 developed countries that comprise the MSCI World Index, 31/12/2003 – 31/12/2024. All returns are presented in dollars. All returns are net of international withholding taxes, except for US, which are gross.