European Stock Market: Will There Be Further Rise?
2025-02-24
■ With the increase in capital inflows, the previous stagflation situation in European stock markets has improved.
■ The recent stock price increase is still in the expected stage, and the market needs to observe whether the expectations for performance growth have increased.
The strong performance of European stock markets is particularly prominent. As of the 20th, the STOXX Europe 600 Index has risen 8.5% since the beginning of the year, outperforming the US stock market (the S&P 500 Index rose 4.0%) and the Japanese stock market (the Topix Index fell 1.8%). The reason behind this may be the differences in the policy positions of major central banks. The Federal Reserve (FRB) remains vigilant about high inflation, as the impact of the Trump administration's tariff policy on the economy and prices still needs further observation, and the Federal Reserve is cautious about additional interest rate cuts. The Bank of Japan (BOJ) continues to implement a moderate interest rate hike policy. In contrast, the European Central Bank (ECB) cut interest rates for the fourth consecutive time at its meeting on January 30 and hinted that it may continue to be cut. This policy adjustment was welcomed by the market driving the previously relatively lagging European stock market to attract large amounts of capital inflows.
The forecast price-to-earnings ratio (PER) of the Stoxx Europe 600 Index for the next year is 13.9 times, which is close to the average level since 2018 (14.1 times), which means that the market's low valuation advantage has disappeared. The expectation of interest rate cuts by the European Central Bank and the recently released overall good performance of the index's constituent companies from October to December 2024 has driven the improvement of market sentiment. In addition, among the "triple pressures" faced by European companies, are (1) stagnant economic growth in Europe, (2) the deterioration of export companies' performance due to the Trump administration's tariff increase, and (3) the further decline in Chinese demand due to the Sino-US trade friction, which in turn suppressed the performance of European luxury giants, the market's view on (2) and (3) has gradually become optimistic. This is also a factor in the market's rise.
In addition, as the United States and Russia have started ceasefire negotiations on the Ukrainian war, the market expects that global investors may reallocate their investment weights in European stocks that have been reduced due to Russia's invasion of Ukraine. This expectation has also become a factor in the market's rise.
However, the expected earnings per share (EPS) growth rate in 2025 has remained at around 8% since late October last year, indicating that the market's expectations for corporate earnings improvement have not yet significantly increased, and corporate earnings growth has not yet become the core driving force for stock price increases. Therefore, to further consolidate the upward trend of European stocks investors still need to carefully observe whether the expectations for performance growth can heat up.
■ The recent stock price increase is still in the expected stage, and the market needs to observe whether the expectations for performance growth have increased.
The strong performance of European stock markets is particularly prominent. As of the 20th, the STOXX Europe 600 Index has risen 8.5% since the beginning of the year, outperforming the US stock market (the S&P 500 Index rose 4.0%) and the Japanese stock market (the Topix Index fell 1.8%). The reason behind this may be the differences in the policy positions of major central banks. The Federal Reserve (FRB) remains vigilant about high inflation, as the impact of the Trump administration's tariff policy on the economy and prices still needs further observation, and the Federal Reserve is cautious about additional interest rate cuts. The Bank of Japan (BOJ) continues to implement a moderate interest rate hike policy. In contrast, the European Central Bank (ECB) cut interest rates for the fourth consecutive time at its meeting on January 30 and hinted that it may continue to be cut. This policy adjustment was welcomed by the market driving the previously relatively lagging European stock market to attract large amounts of capital inflows.
The forecast price-to-earnings ratio (PER) of the Stoxx Europe 600 Index for the next year is 13.9 times, which is close to the average level since 2018 (14.1 times), which means that the market's low valuation advantage has disappeared. The expectation of interest rate cuts by the European Central Bank and the recently released overall good performance of the index's constituent companies from October to December 2024 has driven the improvement of market sentiment. In addition, among the "triple pressures" faced by European companies, are (1) stagnant economic growth in Europe, (2) the deterioration of export companies' performance due to the Trump administration's tariff increase, and (3) the further decline in Chinese demand due to the Sino-US trade friction, which in turn suppressed the performance of European luxury giants, the market's view on (2) and (3) has gradually become optimistic. This is also a factor in the market's rise.
In addition, as the United States and Russia have started ceasefire negotiations on the Ukrainian war, the market expects that global investors may reallocate their investment weights in European stocks that have been reduced due to Russia's invasion of Ukraine. This expectation has also become a factor in the market's rise.
However, the expected earnings per share (EPS) growth rate in 2025 has remained at around 8% since late October last year, indicating that the market's expectations for corporate earnings improvement have not yet significantly increased, and corporate earnings growth has not yet become the core driving force for stock price increases. Therefore, to further consolidate the upward trend of European stocks investors still need to carefully observe whether the expectations for performance growth can heat up.