US or Europe?

Answer: There are three main reasons for this preference: U.S. stocks have strong fundamentals, tariffs on European products may place pressure on their growth outlook, and the U.S. economy continues to be a global growth leader. 

Three years ago on February 24^th, we awoke to news of the Ukraine/Russia war.

Initially, the expectation was for a quick resolution to the invasion by Russia into Ukraine. The prolonged war has been costly in lost lives, impacting millions of Ukrainians. The war continues to be costly in other ways. President Trump is working to mediate an end to the conflict which has led to a resurgence in European stocks, which are having the best start to the year since 2000. In the last ten out of twelve years, Europe has lagged behind the US in equity performance. This, and discussion of China’s Artificial Intelligence developments, have caused some investors to examine the idea of “American Exceptionalism” begging the question, “Will European stocks outperform relative to US equities?” 

Here are five reasons why long-term investors may favor U.S. equities over European names: 

1. U.S. Economic Growth: The U.S. economy is projected to grow 2.4% in 2025, compared to the 1.0% growth rate expected in Europe. It has been the ongoing peace negotiations in Ukraine, elections in Germany potentially bringing expansionary fiscal policies and France passing its 2025 budget that has boosted European stocks. These short-term factors may not sustain recent momentum. 

Europe's structural challenges, such as low productivity, excessive regulation, and intense competition from China indicate a growth rate lagging that of the U.S. resulting in weaker earnings growth for European companies.

1. Tariff Risks for Europe: Global economic and trade policy uncertainty will likely impact Europe more than the U.S. because the U.S. is more self-sufficient and service-oriented, relying less on trade goods, whereas Europe is more dependent on trade. Exports account for ~50% of Europe's GDP, compared to just 11% in the U.S. 
2. Superior US Fundamentals justifies a widening premium for U.S. valuations. For instance, the U.S. is projected to achieve higher earnings per share (EPS) growth in 2025 compared to Europe at 13% vs. 10%. In addition, U.S. companies are expected to see stronger dividend growth for the third straight year. The U.S. infrastructure promotes innovation, with approximately 50% of global venture capital investment happening in the U.S., compared to just 20% for all of Europe. Overall, these factors should continue supporting U.S. outperformance and a premium valuation over Europe.
3. Sector Preferences: Tech Favors the U.S.—Sector composition has been a tailwind for Europe year-to-date, but the trend isn’t expected to last. European stocks benefited from the impressive performance from names in the financial sector. Earning growth going forward favors the tech sector due to strong earnings growth and continued investment in AI. The expected tech resurgence favors the US. 
4. European Pullback Is Likely: European equities increased approximately 10% in US dollar terms, outperforming the U.S. by roughly 6%. Because of this, some investors shifted into European stocks. This rotation has been supported by recent fund flows. Market reactions in Europe may be attributed to peak pessimism already being priced into companies’ performance and the potential for ceasefire talks in Ukraine. However, the strong gains in Europe suggest that without additional clear positive catalysts, further gains may be challenging. Stay focused and plan accordingly.