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Europe Investing Gains Wall Street Favor: Time to Jump Into ETFs?
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Is it time to buy Europe? Wall Street strategists are increasingly igniting this conversation as investors weigh the economic toll of tariffs and a likely flare-up in inflation in the United States. Several major investment banks now believe European equities are set to outperform their U.S. counterparts by the widest margin in over 20 years, according to a Bloomberg survey of 20 strategists, as quoted on Yahoo Finance.
Among the most bullish forecasts, JPMorgan and Citi forecast European stocks to outpace the United States by the widest margin in decades, as quoted on Yahoo Finance. UBS is also betting big on Europe. Historic fiscal reforms in Germany and resilient corporate earnings led to the bullishness in Europe investing.
This divergence in outlook implies a potential 25-percentage-point outperformance by the Stoxx 600 over the S&P 500 in 2025, according to JPMorgan—the largest margin on record. Citi’s forecast would mark the biggest gap since 2005, as quoted on Yahoo Finance.
Some winning Europe ETFs of past week are iShares MSCI Spain ETF (EWP - Free Report) , First Trust Eurozone AlphaDEX ETF (FEUZ - Free Report) , iShares MSCI United Kingdom Small-Cap ETF (EWUS - Free Report) , First Trust STOXX European Select Dividend Index ETF (FDD - Free Report) , First Trust Europe AlphaDEX Fund (FEP - Free Report) and iShares MSCI Europe Small-Cap ETF (IEUS - Free Report) . EWP, FEUZ, EWUS, FDD, FEP and IEUS added 5.1%, 2.7%, 3.5%, 3%, 3.4%, and 2.2%, respectively (as of May 20, 2025).
Economic Momentum Shifting Toward Europe
While the U.S. economy has recently outperformed, UBS believes this gap may soon narrow. The bank also notes that household savings are more abundant and less depleted in Europe than in the United States. Additionally, easier bank lending conditions in Europe could further support economic activity.
Easing Monetary Policy Gives Europe an Edge
UBS sees monetary policy as a key differentiator. Several European central banks have already begun easing interest rates, and so has the European Central Bank (ECB). With inflation cooling more steadily in Europe than in the United States, the chances of lower rates are higher in the Eurozone. Their models indicate that rate cuts in Europe are likely to have a stronger stimulative effect on the economy compared to the United States.
Cheaper Valuations Favor European Equities
More attractive valuations in Europe are another tailwind. Furthermore, the sector-adjusted P/E ratio in Europe is currently 18% below that of the United States, a gap only seen during recessions or Eurozone crises, or grave conditions not currently in play.
Europe ETFs have been undervalued than U.S. stocks and ETFs. The P/E ratio of the largest Europe ETF Vanguard FTSE Europe ETF (VGK - Free Report) stands at 12.26X while its U.S. counterpart — Vanguard S&P 500 ETF (VOO - Free Report) — trades at a P/E of 24.72X. Other big Europe ETFs have also been trading at a discount to U.S. ETFs, driving a rally in the former funds this year against an improving economic backdrop.
Earnings Momentum Turning Positive
UBS notes that the relative earnings momentum is now tilting in Europe’s favor, supported by a weaker euro and improving PMIs, which are expected to boost earnings revisions.
Importantly, European companies — excluding financials — have healthier and more sustainable profit margins than their U.S. counterparts. In the United States, 67% of margin expansion has come from unsustainable sources such as ultra-low interest rates and tax cuts compared to just 3% in Europe, as quoted on CNBC.
No Tech-Dependent Rally in Europe
U.S. indexes like the S&P 500 and the Nasdaq were tech-dependent. The “Magnificent 7” stocks and their exposure to the booming artificial intelligence (AI) field led to the rally in U.S. stocks last year. But the Mag 7 stocks have been facing a challenging time this year thanks to the emergence of China’s DeepSeek and severe tariff threats (read: DeepSeek Buzz Boosts China Tech ETFs).
With big tech stocks under pressure in early 2025, big U.S. indexes (that have so far enjoyed a concentrated rally) also succumbed to a failure in that period. On the contrary, winning Europe ETFs have major exposure to non-cyclical and other sectors associated with broader economic growth.
This points toward more sustainability. In a nutshell, Europe ETFs have presented a broad-based rally instead of a concentrated one.
Bottom Line
While the broad-based rally is beneficial for Europe ETFs, we would like to note that Trump's tariffs may hinder Europe's growth to some extent. Investors need to remain vigilant about this.
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Europe Investing Gains Wall Street Favor: Time to Jump Into ETFs?
Is it time to buy Europe? Wall Street strategists are increasingly igniting this conversation as investors weigh the economic toll of tariffs and a likely flare-up in inflation in the United States. Several major investment banks now believe European equities are set to outperform their U.S. counterparts by the widest margin in over 20 years, according to a Bloomberg survey of 20 strategists, as quoted on Yahoo Finance.
Among the most bullish forecasts, JPMorgan and Citi forecast European stocks to outpace the United States by the widest margin in decades, as quoted on Yahoo Finance. UBS is also betting big on Europe. Historic fiscal reforms in Germany and resilient corporate earnings led to the bullishness in Europe investing.
This divergence in outlook implies a potential 25-percentage-point outperformance by the Stoxx 600 over the S&P 500 in 2025, according to JPMorgan—the largest margin on record. Citi’s forecast would mark the biggest gap since 2005, as quoted on Yahoo Finance.
Some winning Europe ETFs of past week are iShares MSCI Spain ETF (EWP - Free Report) , First Trust Eurozone AlphaDEX ETF (FEUZ - Free Report) , iShares MSCI United Kingdom Small-Cap ETF (EWUS - Free Report) , First Trust STOXX European Select Dividend Index ETF (FDD - Free Report) , First Trust Europe AlphaDEX Fund (FEP - Free Report) and iShares MSCI Europe Small-Cap ETF (IEUS - Free Report) . EWP, FEUZ, EWUS, FDD, FEP and IEUS added 5.1%, 2.7%, 3.5%, 3%, 3.4%, and 2.2%, respectively (as of May 20, 2025).
Economic Momentum Shifting Toward Europe
While the U.S. economy has recently outperformed, UBS believes this gap may soon narrow. The bank also notes that household savings are more abundant and less depleted in Europe than in the United States. Additionally, easier bank lending conditions in Europe could further support economic activity.
Easing Monetary Policy Gives Europe an Edge
UBS sees monetary policy as a key differentiator. Several European central banks have already begun easing interest rates, and so has the European Central Bank (ECB). With inflation cooling more steadily in Europe than in the United States, the chances of lower rates are higher in the Eurozone. Their models indicate that rate cuts in Europe are likely to have a stronger stimulative effect on the economy compared to the United States.
Cheaper Valuations Favor European Equities
More attractive valuations in Europe are another tailwind. Furthermore, the sector-adjusted P/E ratio in Europe is currently 18% below that of the United States, a gap only seen during recessions or Eurozone crises, or grave conditions not currently in play.
Europe ETFs have been undervalued than U.S. stocks and ETFs. The P/E ratio of the largest Europe ETF Vanguard FTSE Europe ETF (VGK - Free Report) stands at 12.26X while its U.S. counterpart — Vanguard S&P 500 ETF (VOO - Free Report) — trades at a P/E of 24.72X. Other big Europe ETFs have also been trading at a discount to U.S. ETFs, driving a rally in the former funds this year against an improving economic backdrop.
Earnings Momentum Turning Positive
UBS notes that the relative earnings momentum is now tilting in Europe’s favor, supported by a weaker euro and improving PMIs, which are expected to boost earnings revisions.
Importantly, European companies — excluding financials — have healthier and more sustainable profit margins than their U.S. counterparts. In the United States, 67% of margin expansion has come from unsustainable sources such as ultra-low interest rates and tax cuts compared to just 3% in Europe, as quoted on CNBC.
No Tech-Dependent Rally in Europe
U.S. indexes like the S&P 500 and the Nasdaq were tech-dependent. The “Magnificent 7” stocks and their exposure to the booming artificial intelligence (AI) field led to the rally in U.S. stocks last year. But the Mag 7 stocks have been facing a challenging time this year thanks to the emergence of China’s DeepSeek and severe tariff threats (read: DeepSeek Buzz Boosts China Tech ETFs).
With big tech stocks under pressure in early 2025, big U.S. indexes (that have so far enjoyed a concentrated rally) also succumbed to a failure in that period. On the contrary, winning Europe ETFs have major exposure to non-cyclical and other sectors associated with broader economic growth.
This points toward more sustainability. In a nutshell, Europe ETFs have presented a broad-based rally instead of a concentrated one.
Bottom Line
While the broad-based rally is beneficial for Europe ETFs, we would like to note that Trump's tariffs may hinder Europe's growth to some extent. Investors need to remain vigilant about this.