European markets continued to outperform their US counterparts despite the recent rebound on Wall Street. The banking and industrial sectors stand as the top two performers, driven by relatively cheaper valuations, expectations for surging defence spending, and optimistic economic outlooks. On Tuesday, European stock markets snapped a three-day losing streak following news that US President Donald Trump may soften his tariff stance.
The pan-European Stoxx 600 index rose 0.67%, the DAX jumped 1.13%, and the CAC 40 climbed 1.08%. In the year to date, Europe’s equity markets continue outperforming their US counterparts, with the Stoxx 600 gaining 8.9% and Germany’s DAX up 16%, while the S&P 500 is down 3% and the Nasdaq fell 5.4%. Relatively cheaper valuations, expectations for surging defence spending, and more accommodative monetary policies have all contributed to the rally in European markets this year.
A possible permanent ceasefire in the Ukraine war has also provided optimism toward Europe’s economic outlook. Goldman Sachs analysts expect European equities to continue the uptrend with a 5-6% upside for a 12-month target. The recent economic data points to upside potential for the bloc’s economic growth.
On Monday, S&P Global released better-than-expected flash manufacturing Purchasing Manager Indexes (PMIs) for major economies. While the data remained in contraction, the decline in Germany was the mildest since September 2022. “Some firms attributed this rise to stronger domestic demand and clients replenishing stocks,” the report stated.
On the other hand, Trump’s tariffs and his efforts to reduce the US deficit have led to growing uncertainties about the country’s economic outlook, which, in turn, hurt equity valuations, particularly in well-known tech stocks. On Tuesday, data from the Conference Board showed that US consumer expectations tumbled to the lowest level in 12 years. Europe’s financial sector was the top performer in the Stoxx 600 Index, up 23% in the past three months.
In 2024, the banking sector gained 25%, compared with the Stoxx 600’s 5% rally. Robust earnings results, generous dividends, and share buyback programmes have all contributed to the sector’s outperformance.
European market gains driven by banks
Eurozone’s major banking stocks, including Banco Santander, BNP Paribas, and Intesa Sanpaolo, all hit all-time highs on Tuesday. Particularly, the Spanish lender Santander’s shares surged 49% this year, becoming the first Eurozone bank topping a €100 billion market capitalization, alongside Switzerland’s UBS and the UK-based HSBC. BNP Paribas experienced a 37% year-to-date rally, with a capitalization of €92 billion.
Shares of Italy’s biggest lender, Intesa Sanpaolo, also jumped 2.8% on Tuesday and gained 28% this year, making it the third-biggest bank in the EU, with a market valuation of €88 billion. The European industrial sector gained 16% in the last three months, making it the second-best performer. The sector’s gains were primarily driven by defence stocks as the EU plans to boost defence spending.
Germany’s historical debt reform is set to unlock hundreds of billions of euros to invest in defence and infrastructure. Industrial stocks, seen as a typical cyclical sector relating to economic growth, comprising aerospace/defence companies and major energy firms, are expected to be the biggest beneficiaries of increased fiscal spending. Germany’s ammunition manufacturer Rheinmetall’s stocks soared more than 100% this year, and France’s Thales SA surged 80% this year.
Other stocks in this group, including British firms such as BAE Systems and Rolls Royce Holdings, were both up by 36% year-to-date. However, risks remain in the European markets. Trump’s tariffs are expected to impact the global economy as a whole due to trade barriers.
Central banks, including the European Central Bank, foresee higher inflation and slower economic growth. These dynamics will likely slow the pace of the easing cycle, which could restrain business growth. All major European firms are exposed to global markets, with some owning US divisions.
Hence, a global trade war will certainly ripple through European markets and hurt sentiment. In conclusion, European stock markets have shown resilience and growth driven by strong performance in the banking and industrial sectors. While optimistic economic outlooks and strategic fiscal spending have bolstered market confidence, uncertainties such as trade tensions and inflation remain potential challenges ahead.
