Will European equities outperform the US in 2025?

Episode Summary

Executive Summary: Barclays strategists debate whether European equities can outperform U.S. stocks in 2025. The U.S. case rests on stronger growth, earnings momentum, and tech dominance, while Europe’s case hinges on valuation discounts, lower expectations, weaker positioning, ECB easing, fiscal/political reforms, and relief from tariffs or geopolitical improvements.

Main Topics: U.S. tech dominance and earnings leadership (Priority: 5/5): Venu argues U.S. outperformance is still driven by the Mag 7 and broader tech strength, which continues to deliver earnings upside and supports U.S. market leadership. Europe's valuation discount and relative positioning (Priority: 5/5): Emmanuel says Europe is cheap, under-owned, and positioned for a potential rerating if even a few catalysts turn positive, making the asymmetry attractive. Macro growth divergence: U.S. resilience vs Europe stagnation (Priority: 5/5): The debate contrasts stronger U.S. GDP, consumer health, and earnings momentum with Europe’s weaker growth, but improving PMIs and expected ECB cuts offer some support for Europe. Policy, politics, and fiscal catalysts in Europe (Priority: 4/5): Potential German reform under a center-right coalition, French budget progress, and broader EU policy changes are cited as possible catalysts for European equities. Trump policies and trade risk (Priority: 4/5): Trump’s tariffs, deregulation, tax cuts, and immigration policies are discussed as both a headwind and tailwind for the U.S., while Europe remains vulnerable to trade frictions. Big tech concentration and market concentration risk (Priority: 3/5): Both speakers acknowledge concentration risk: U.S. equity performance is heavily tech-led, while Europe’s recent gains are also concentrated in a few names. China exposure and European cyclicals (Priority: 3/5): Europe’s sensitivity to China is highlighted as a key factor, with stabilization in China potentially helping European sectors and stocks that have been under pressure.

Key Arguments: U.S. equities still have an earnings advantage: even excluding major tech names, Barclays expects S&P 500 earnings growth of 6% vs 4% for Europe. The U.S. economy is more resilient, with stronger consumer/income dynamics and 2025 GDP forecast at 2.3% versus 0.8% for the Euro area. U.S. market leadership has been unusually concentrated, and much of the gap versus Europe is attributable to the Mag 7. Europe’s relative underperformance has created a record valuation discount, making it attractive if sentiment improves. The ECB is expected to cut rates more aggressively than the Fed, potentially supporting European activity in the second half. Germany’s election and possible fiscal/supply-side reforms could be a major positive for European equities. Trump’s tariff threats may hurt both the U.S. and Europe, but less-aggressive-than-feared tariffs could provide relief to Europe and reduce the U.S. exceptionalism premium. Europe’s open economy and China exposure make it vulnerable, but that same vulnerability means stabilization in China or easier trade conditions could produce upside surprises.

Data Points: S&P 500 outperformance vs Stoxx 600: More than two-thirds of the time over the last 25 years - Used to underscore the historical persistence of U.S. equity leadership. Europe outperformance since 2016: Once - The only year Europe beat the U.S. in that period was 2022, a bear market year. U.S. equity exposure to tech, media, telecom: More than 40% - Compared with 11% in Europe, illustrating the concentration advantage/disadvantage. Europe exposure to tech, media, telecom: 11% - Shows Europe’s much smaller technology weight relative to the U.S. U.S. equity inflows to tech since 2020: More than one-third - Illustrates how flows have favored U.S. tech leadership. S&P 500 earnings growth forecast: 6% - Barclays forecast for 2025, even excluding the big six tech names. Europe earnings growth forecast: 4% - Barclays forecast for 2025. U.S. margin expansion ex-big tech: 70 bps - Expected improvement in U.S. margins without large tech names. Europe margin expansion: 15 bps - Expected improvement in European margins. U.S. forward earnings growth revision: +7% - Change over the last 12 months. Europe forward earnings growth revision: -2% - Change over the last 12 months. ECB policy rate expectation: 1.5% by year-end - Emmanuel’s expectation for ECB cuts to support growth. U.S. GDP forecast: 2.3% - Barclays economists’ forecast for 2025 U.S. growth. Euro area GDP forecast: 0.8% - Barclays economists’ forecast for 2025 Euro area growth. U.S. equity risk premium: Negative - Venu says it is currently near/under zero, implying rich valuations. Europe valuation percentile: 46th percentile forward P/E - Stoxx 600 valuation excluding context of the U.S. comparison. Rest of S&P 500 valuation percentile: 90th percentile forward P/E - Excluding big tech, the rest of the U.S. market is still expensive versus its history. Europe underperformance in 2024: Biggest on record - Cited as evidence that Europe may be due for a catch-up rally.

Pivotal Quotes: "If you remove them from S&P 500, it has pretty much performed in line with Europe in recent years." — Emmanuel Kao: Arguing that U.S. outperformance is largely a Mag 7 story rather than broad-based market superiority. "The U.S. looks almost price of perfection to me." — Venu Krishna: Describing why U.S. valuation levels make future upside look limited relative to Europe. "Given how cheap and under-owned Europe is, I think the bar for positive surprises is quite low." — Emmanuel Kao: Summarizing the bullish Europe view based on valuation, positioning, and catalyst sensitivity.

Implications: Listeners should see 2025 as a contest between U.S. earnings quality and Europe’s valuation/catalyst setup. Europe can win if growth stabilizes and policy improves, but U.S. leadership remains anchored by tech and stronger macro momentum.