There was a lot of buzz around American exceptionalism not too long ago. Many believed the US market was the only one worth focusing on, especially with big tech stocks seen as safe investments. But recent trends suggest a shift.
Since Donald Trump’s election, European stocks have outperformed their US counterparts. While the long-term picture may look different, this newfound interest in Europe is exciting. People are starting to ask more questions about European markets.
Evidence of this shift can be seen in fund flows. In early March, Western European equity funds saw a $4 billion influx, the highest in three years. This brings the total for the year to over $10 billion. Although this amount seems small compared to US funds, it marks a significant change in investor sentiment toward Europe, which has struggled for a decade.
For four consecutive weeks, Western European equity funds have attracted new investments—the longest streak of inflows since the stock market frenzy in mid-2021.
But can this momentum continue? It’s hard to say. Europe’s economic situation can be likened to a sports team that often leaves fans disappointed. However, there are signs of optimism among investors.
Barclays’ European equity team points out that recent gains are primarily due to a “relief rally.” They believe news from Germany could be the catalyst for lasting change. The easing of fears about tariffs, hopes for a ceasefire in Ukraine, and a boost in earnings expectations all contributed to this positive sentiment. This has pushed price-to-earnings multiples back to fair value levels, reducing some of the risk premiums that built up after Trump’s election.
Germany’s recent fiscal proposals include a significant investment in infrastructure and changes to debt policies. These initiatives, combined with supportive monetary policies, may reignite growth in Europe. If successful, this could change investor attitudes and lead to increased allocations toward the region.
In summary, while caution remains, the signs of a potential economic shift in Europe can’t be ignored. Investors who have long focused on the US may need to reconsider their strategies.
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