Why are European stock markets performing better than the United States and can they continue to rise

What are the main European stock markets?

The largest pan-European stock market is the Euronext exchange, which is based in Amsterdam but has its operational centre in Paris. Euronext covers the Amsterdam, Brussels, Dublin, Lisbon, Milan, Oslo and Paris marketplaces.

The main European stock market indices are the Stoxx indices (Stoxx 50 and Stoxx 600), which track stocks from 17 countries across the Eurozone. There is also the Euronext 100 which tracks the 100 largest and most liquid stocks traded on Euronext.

The national stock markets that are most commonly tracked include Germany’s DAX and France’s CAC. Their major indices are the DAX 40 and CAC-40, which track the forty largest stocks in each respective country.

Then there is the FTSE 100, which tracks the 100 largest UK stocks. It depends largely on context whether or not these would be included among European stocks. Generally, they aren’t associated with European stock markets, but in certain trends such as the recent shift towards defence stocks, it makes sense to consider UK and European stocks alongside one another.

Why are European stock markets outperforming the US?

As Somerset Webb points out, US valuations have been over-stretched for some time, while European stocks have been persistently cheap.

Cheap doesn’t necessarily mean undervalued – for years, they have looked like a value trap – but it does mean there is room for upside, should conditions or productivity improve. Both look like they are.

The ECB cut interest rates on 6 March. Granted, that was partly driven by the economic uncertainty the continent faces in light of the US pulling its military support for Ukraine. However, with that comes the potential for greater European spending on defence.

European companies have upped their game. “The Q4 earnings season exceeded expectations, reviving EPS growth after a period of stagnation,” says Akoner.

“Banks have led the way, with names like Santander, Intesa, and BBVA accounting for the bulk of the upside surprises. The tech sector (ASML, Infineon) has also performed well, though luxury giant LVMH and pharmaceutical leader Sanofi have been notable underperformers.”

Conversely, the overvaluation of US stocks means there is little upside and plenty of downside potential.

The Federal Reserve (Fed) signalled last month that its rate-cutting cycle is done for the time being. While the language around the ECB’s March decision hints that the same could now be true in Europe, it post-dates the Fed’s apparent pause, and leaves Eurozone interest rates substantially lower than those in the US.

Fears of a ‘Trumpcession’ – a self-inflicted recession off the back of the trade war that Trump is intent on waging – create a gloomy outlook for the US economy.

European investors also appear to have soured on the US. The FT cites Morningstar data showing that European-domiciled ETFs investing in US equities experienced $510 million in outflows in the month to 24 February, despite total European ETF flows rising to $35.3 billion.

Europeans aren’t just going off US stocks, but also US products. Trump has previously stated that he might use tariffs to incentivise Europeans to buy more US cars. So far, his administration seems to have had the opposite effect: sales of Tesla cars in Europe have fallen 45%, contributing to Tesla’s share price falling more than 30% so far this year.

Can the European stock market rally last?

The question of course is whether the European stock market rally is a short term response to the economic conditions that have materialised at the start of 2025, or reflective of a longer-lasting trend.

To some extent that will depend on how the macro situation unfolds. It’s far from clear how far Trump is really prepared to push the inflationary risks of his tariffs, and how damaging they might be to Europe in particular.

A peace deal between Russia and Ukraine – whatever the terms – would change the global economic outlook significantly. This would likely be to Europe’s benefit, but it could also reinvigorate US stocks.

As things stand, though, the evidence doesn’t point to Europe’s rally dwindling out. The DAX 40 is making new highs, but as Akoner highlights, 74% of its constituents are trading above their 200-day moving average, compared to 96% at its previous market tops, “suggesting that momentum, while positive, is not extreme”.

However, she adds that a failure to expand profit margins in 2025 could cause the rally to “lose steam”.