ClockWise: Mind EUR eye

Uncertainty around the incoming Donald Trump administration’s policies remain. Recent days have seen a series of social media posts from Trump announcing plans to place tariffs on three of its major trading partners.

Geopolitical tensions also remain high, with further intensification in the conflict between Russia and Ukraine. Despite all that, global equity markets have yet to show any persistent weakness – as of yesterday’s close, the MSCI All Country World Index was less than 0.5% away from its all-time high in local currency terms.

While global equity indices show strength, US shares are doing most of the heavy lifting. Under the surface, other areas of the market are showing more signs of weakness. European stocks in particular continue to underperform. The Eurostoxx 50 has fallen by -3.9% over the last six months, while the S&P 500 has rallied strongly, leading to a 17.5% outperformance of US stocks versus Europe. European equities have underperformed not just the strong US market, but also versus global peers (Chart 1).

Chart 1: Europe the worst equity region of late

Source: LSEG Datastream, RLAM as at 25 November 2024. Performance of Europe ex UK shares vs equally weighted global equity basket.

We see a few key reasons why euro area stocks continue to lag behind global peers. Firstly, the softer macro data in the euro area presents a stark contrast with the more resilient picture shown in the US. Last week, while the US PMI continued to signal robust growth, the euro area PMI weakened substantially, signalling contracting private sector activity growth. Business optimism moved in opposite directions, too. Deteriorating sentiment for the region has likely been impacted by the US election, with expectations that the Trump administration will levy substantial tariffs against the EU.

The weak relative earnings picture has probably been a more important driver of the underperformance year to date, though. Aggregate company earnings in the euro area continue to experience more downgrades than upgrades, with the pace of these downgrades increasing at a faster rate than any other region we monitor globally (Chart 2).

Aggregate company earnings in the euro area continue to experience more downgrades than upgrades

Chart 2: Europe the worst equity region of late

Source: LSEG Datastream, RLAM as at 25 November 2024. Analyst earning revisions upgrades vs downgrades.

The euro has also come under pressure over recent weeks. Since late September, the currency has fallen by more than 6% on fears that the Trump administration would impose tariffs that would hit Europe’s exports and economic growth. While in recent weeks, expectations for US rate cuts have been reined in, this has not been the case for the European Central Bank. The euro fell to its lowest level in over two years last week, albeit recovering somewhat at the time of writing, following Trump’s most recent tariff threats, which did not mention Europe.

Should the focus of tariffs shift meaningfully away from Europe, this would likely be a positive for European growth and business confidence, providing a boost to the currency and risk assets in the region. However, with over a month to go until the Trump administration even takes office, it is hard to imagine that this is out of scope. Tariffs are clearly a priority for Trump and with a shadow already cast over the European economy, it is fair to see why some investors are calling for EUR/USD to move to parity.

Chart 3: Euro under pressure post-election 

Source: LSEG Datastream as at 25 November 2024. EURUSD foreign exchange rate.

We continue to hold a pessimistic outlook for the euro and European equities. However, we do not rule out that following this recent period of extreme underperformance, these could be primed to rebound from their lows. This comes especially as we head into December, a month which has traditionally been the best month of appreciation for the euro as a currency and positive for stock markets in general. Stronger activity data and an improvement of sentiment around US-Europe relations could also be beneficial.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.