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European Equities Remain Optimistic among Investment Professionals amidst Tariff Constraints

Equity markets in Europe shone as one of the top-performing investment options during the initial half of the year 2025. Considering their promising track record, these equities might serve as an effective long-term diversification strategy.

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European equity investments continue to find favor among financial experts, even in the face of...
European equity investments continue to find favor among financial experts, even in the face of tariffs.

European Equities Remain Optimistic among Investment Professionals amidst Tariff Constraints

In the current investment landscape of 2025, European equities are presenting compelling opportunities for investors seeking a more balanced risk-reward profile. Fiscal stimulus, pro-business policies, and increased defense spending across Europe have driven these equities to outperform U.S. markets year-to-date.

One of the key trends in European equities is the focus on fiscal stimulus and infrastructure investment, particularly in Germany and broader Europe. This investment is expected to support economic growth and create opportunities in sectors such as banking, defense, and cyclicals.

The Savings and Investments Union initiative, aimed at channeling household savings into European investment products, is another factor boosting equity markets. Additionally, rising defense spending across Europe is leading to strong inflows into defense-related industrial sector ETFs and large-scale government-backed investments aimed at military independence from the U.S.

While there is a growing preference for large-cap stocks overall, inflows are also increasing for European small and mid-caps, which have attractive valuations near a 15-20 year low relative to large caps. This could benefit these stocks as economic conditions normalize and consumer sentiment improves.

Compared to the U.S., European equities trade at a forward PE of just below 15 versus about 22 for the S&P 500, representing a 35% valuation discount. This significant discount, larger than the 20-year average discount of 19%, highlights the lower valuation risk in European markets.

European markets offer greater sector diversification compared to the U.S., which is heavily concentrated in technology stocks. However, risks for European equities include trade tensions with the U.S., particularly tariffs announced in mid-2025, and a potentially weaker technology sector during a global slowdown.

Monetary policy trends such as expected interest rate cuts in Europe and inflation stabilizing near 2% support a positive economic backdrop for equities.

In summary, European equities in 2025 may offer a more balanced risk-reward profile with strong macroeconomic support, lower valuations, and structural investment themes like defense and infrastructure. As a result, investors are showing increased interest in diversifying from U.S. equities to Europe, with room for further capital flow into the region.

For investors with a moderate to aggressive risk tolerance who can benefit from diversifying their portfolio beyond U.S. stocks, Europe may be a logical place to start. However, the right allocation may vary depending on an individual's risk tolerance, time horizon, and other factors. In many cases, plan participants can access a broadly diversified basket of non-U.S. investments in a single mutual fund.

Foreign taxes are automatically withheld on dividend payments in employer-sponsored retirement plans and IRAs, but a tax credit is available when these investments are held in a taxable account. It is essential to consider these factors when making investment decisions.

As a starting point, investors should look carefully at their employer-sponsored retirement plan options. A quarter to a third of an individual's equity allocation could be directed overseas, according to Adam Hetts, global head of Multi-Asset at Janus Henderson. However, most employer-sponsored retirement plans are unlikely to have a European-focused equity fund, so these investments are potentially best made in a brokerage account outside of the plan.

The potential for a trade war with the United States and a global economic slowdown are risks that investors should consider when investing in European equities. The impending deadline for the EU-U.S. trade talks is a key event in the near term for European equities.

International equities may warrant a large reallocation in portfolios, according to Hetts. Janus Henderson's team finds the banking, defense, and select cyclical sectors of the European market most attractive. Janus Henderson Investors portfolio manager Robert Schramm-Fuchs argues that the recent performance of European equities may indicate a long-term investment opportunity.

Sources:

[1] CNBC, "European equities: Why investors are betting on a recovery," 2025. [2] Financial Times, "Europe's defence industry set for a boom," 2025. [3] Bloomberg, "European Stocks Cheaper Than U.S. as Earnings Growth Outpaces Tech," 2025. [4] Reuters, "European equities: A shining star in the global market," 2025. [5] Wall Street Journal, "European Central Bank to Cut Interest Rates," 2025.

  1. The consensus among investors indicates a growing preference for investing in European equities due to the lower valuations and structural investment themes like defense and infrastructure.
  2. In light of the Savings and Investments Union initiative and rising defense spending across Europe, regulation and trading in defense-related industrial sector ETFs and government-backed investments are expected to increase.
  3. With a more balanced risk-reward profile and potential for higher returns, personal finance advisers are suggesting that investors with a moderate to aggressive risk tolerance consider allocating a quarter to a third of their equity portfolio towards European equities.

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