The performance gap between the European and US equity markets has exceeded 15% since the start of the year. European equities, up by just under 8%, have shown unusual resilience against a backdrop of correction in the US markets. The latter have fallen by around 10% in euro terms since the start of the year, wiping out all the gains made following the election of Donald Trump in November 2024. The cause: growing economic uncertainties across the Atlantic coupled with a significant correction in major technology stocks, affected in particular by the recent launch of the Chinese artificial intelligence model DeepSeek.
In contrast, Europe is currently enjoying more favourable momentum, buoyed by the prospects of a more expansionary fiscal policy in the region.
Confidence shaken in the USUnis
Donald Trump’s multiple about-faces on the issue of tariffs, particularly with regard to Canada and Mexico, make the US trade strategy complex to interpret, to say the least. Investors fear that these uncertainties will weigh on confidence and ultimately result in a sharp economic slowdown or even recession, a scenario that does not seem to worry the president and his key economic advisers.
The market is also fearful of the effects of a more restrictive fiscal policy across the Atlantic. The highly expansionary policy of recent years has offset the effects of monetary tightening at the cost of a marked deterioration in public finances. US Treasury Secretary Scott Bessent is calling for a “detox from public spending,” an exercise that will inevitably require cuts to social security programmes.
The latest economic statistics do not yet point to a sharp slowdown in economic momentum, but they do fall short of market expectations, as shown by the recent trend in the economic surprise indices. Against this backdrop, the markets have revised their expectations and are now betting on more significant monetary easing in 2025, with three rate cuts anticipated, a factor which has notably contributed to a marked weakening in the dollar against the euro.
A new European dynamic?
Threats to end US military support in Ukraine leave no doubt that Europe needs to adopt structural measures to ensure its military independence. With this in mind, Germany has announced that--subject to a political agreement gathering a qualified two-thirds majority in its Chamber of Deputies--it intends to make a number of exceptional changes to the budget.
On one hand there is the exemption from the debt brake of all defence spending in excess of 1% of GDP. On the other, there’s the creation of a special fund of €500bn over a period of 10 years, aimed at renovating ageing infrastructure. This fund will also be exempt from the debt brake. Finally, the possibility for German’s 16 states to record a deficit of up to 0.35% of GDP, which was previously unthinkable in the prevailing context of budgetary rigour.
These various measures have been very positively received by investors, as they are likely to boost both German and European growth as well as the profits of companies operating in Europe. Logically, these announcements have also triggered a sharp rise in long rates in the eurozone.
However, these measures will have to be confirmed quickly at political level and implemented. The revaluation of the European market (at a level close to the long-term average) leaves little room for disappointment.
