Fast reading
- European stocks have climbed higher than US counterparts in 2025.
- President Trump’s warning this week that 25% tariffs would be applied to EU exports caused European stocks to dip.
- Europe stands to receive a boost from several tailwinds including the prospect of a more dovish stance from the European Central Bank (ECB).
European stocks have had a strong start to the year, but the threat of US tariffs makes the outlook more uncertain.
US President Donald Trump this week announced his administration had reached a decision regarding tariffs on the European Union. Claiming that the US had a US$300bn deficit with the EU, President Trump said tariffs of 25% would be levied on “cars and all other things1” originating from the trading bloc.
The S&P 500 index is down 0.1% year to date, while Europe’s Stoxx 600 is up 8.4% over the same period2. European stocks have outperformed US stocks this year for a variety of reasons. Energy prices have come down from the peaks seen in the aftermath of Russia’s invasion of Ukraine in 20223, for example, and the region has – until now – largely escaped the worst-case scenario regarding a trade war with the US.
Figure 1: European stocks have pulled ahead in 2025
Upside potential
However, while there are a number of risk factors, there are also a number of potential tailwinds for the region including the prospect of a more dovish stance from the European Central Bank (ECB) in light of the progress made in tackling inflation.
The ECB’s executive board expects headline inflation to stabilise around the 2% target in the near future and appears more focused on addressing weaker economic growth through a “middle path for monetary policy”5.
Additionally, a peace agreement in Ukraine would also stand to provide economic benefits to the bloc, both in terms of potentially lower energy prices through the resumption of natural gas supply, and reconstruction needs. The World Bank estimates that the total cost of reconstruction and recovery in Ukraine is US$524bn6 over the next decade, with a financing gap of US$9.96bn for 2025.
If the recent political shift in Germany is indicative of a broader trend, then this could boost economic growth across the eurozone, says Stephen Auth, Chief Investment Officer for Equities at Federated Hermes.
“Last weekend’s German elections signalled an emerging shift within Europe toward more conservative social and economic policy options, while keeping the far right and far left parties at bay. Given the amount of dry economic tinder in Europe, any shift towards less regulation, lower taxes and more private sector could have a powerful multiplier effect,” he says.
The US shows the strongest expectations, the UK falls in the middle, and Europe is on the lower end of GDP growth expectations
Investors remain positive on liquidity
Demand for money market products remains strong and this trend is expected to continue throughout the year, despite divergences between the dollar, sterling and the euro.
“The US shows the strongest expectations, the UK falls in the middle, and Europe is on the lower end of GDP growth expectations. However, none of these regions are facing a recession or stagnation at this time,” says Deborah Cunningham, Chief Investment Officer for Global Liquidity at Federated Hermes.
“Currently, all three currencies are experiencing higher interest rates compared to six months ago, indicating that higher rates are likely to persist for a longer period. This trend reflects the anticipated flow of funds into money markets, even though interest rates are expected to decrease at a slower pace across all three currencies. Importantly, we do not foresee rates approaching the problematic 0-1% bound that could pose challenges for investors in the liquidity space,” she adds.
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1 Source: whitehouse.gov
2 Source: Bloomberg as at 27 February
3 Source: International Energy Agency (IEA)
4 Source: Bloomberg as at 27 February
5 Source: ECB
6 Source: World Bank
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