As noted in our latest Monthly Market Viewpoint, one of the biggest surprises during the first quarter of 2025 has been the outperformance of European equities relative to US stocks. The euro has also surprised with a rally against the US dollar.
We see two main factors explaining this about-turn in consensus views on stocks and the currency:
- A sudden bout of angst in markets about the prospects for the US economy.
- The prospect of a seismic change in Europe’s economic outlook driven by the possibility of a new era in German fiscal policy and European defence spending.
The market’s faith in American exceptionalism has been shaken, both by recent events and the relatively weak US economic data over the last two months.
There remain a lot of questions about the implementation of a major policy change in Germany and the country’s capacity to cope with such a large increase in spending due to labour market and regulatory constraints. Delays to Germany’s policy implementation would test the capacity of European stocks to outperform further.
Given the current high level of uncertainty around international trade, geopolitics, and the potential impact on global growth, our multi-asset team hold a neutral positioning in equities.
