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Daring a little more Europe?
25/06/2025
Europe is trending. As more investors shift capital out of the U.S., European equities, such as those from the Euro Stoxx, DAX & Co, are gaining renewed attention. What’s driving this change in strategy, and could it be a smart move?
Summary
- For the first time in years, European stocks have significantly outperformed their American counterparts.
- A weaker U.S. dollar is weighing on portfolios heavily invested in U.S. securities.
- Valuations, economic outlook, and diversification benefits all currently favor Europe.
André Kostolany once said: “In my heart I am European, but my money is in America.” Over the years, many investors have followed the advice of the famous Hungarian stock market philosopher—some knowingly, others by default.
And why not? For nearly a decade, U.S. stocks consistently outperformed their European counterparts—sometimes by a wide margin. In fact, the last time the Euro Stoxx 50 outperformed the S&P 500 was in 2015—and even then, only narrowly.
Kostolany, known for his pointed and humorous remarks, used this quote to capture a common investor mindset: emotional and cultural affinity with Europe, paired with financial confidence in the U.S. economy. But today, the tide may be turning.
Europe Is Catching Up
Since the introduction of U.S. President Donald Trump’s erratic tariff policies, many long-held assumptions have been called into question. Is America still the anchor of global economic stability? Increasingly, investors aren’t so sure. As confidence wavers, more capital is shifting from U.S. markets to Europe.
Vincenzo Vedda
Chief Investment Officer, DWS
U.S. market performance has been underwhelming in 2025. From January to early June, the S&P 500 rose by just 0.5%, while the tech-heavy Nasdaq 100 gained just over 1% in the same period. In contrast, the Euro Stoxx 50 rose by 10%, and the German DAX even led the major indices with a 20% increase.
The Weak Dollar Adds Pressure
For euro-based investors, the case for European equities is even stronger thanks to currency effects. Since the start of the year, the U.S. dollar has fallen by more than 10% against the euro, eroding the value of American holdings in European portfolios. This means that even if U.S. stocks rise slightly, returns calculated in euros may still be negative.
And the outlook for the dollar remains dim. International investors remain cautious due to ongoing policy unpredictability in the U.S. Economic forecasts also support this trend. DWS expects U.S. economic growth to slow from 2.8% last year to 1.2% in 2025 and 1.3% in 2026. In contrast, Germany is expected to rebound from a 0.2% contraction to 1.6% growth in 2026.
Europe’s relatively low national debt and continued trade surplus also support a stronger euro. While U.S. debt stands at over 120% of GDP, the EU average is 82%, with Germany at just 64%. And despite American efforts to correct trade imbalances, the EU’s surplus with the U.S. has continued to grow[1].
Global Funds Often Overweight U.S. Stocks
These trends also have implications for investors in funds and ETFs. Many global portfolios remain heavily concentrated in U.S. equities—often unintentionally. The strong performance of tech giants like Nvidia, Apple, and Microsoft has led many passive funds to become heavily weighted toward U.S. markets.
For example, the MSCI World Index which tracks about 1,500 large-cap stocks across developed markets, is now over 70% weighted towards U.S. stocks, while European stocks make up only 15–17%[2] In other words, holding an ETF based on the MSCI World essentially means being heavily invested in the U.S.—and thus exposed to its current challenges.
Strong US overweight
Concentration risk in MSCI World - country weights through time
US equities have always been particularly well represented in the MSCI World Index compared to European stocks. However, the gap has been widening steadily for 15 years.
Source: JP Morgan Chase & Co, DWS Investment GmbH, as at 23 January 2025.
Actively Managed Funds Can Adapt
Many institutional investors and active portfolio managers have already begun reallocating capital in response to shifting market dynamics. Several DWS funds, for example, have reduced exposure to U.S.-centric companies and increased holdings in firms with a stronger European focus. Active portfolio managers can also selectively invest in companies likely to benefit from government spending in specific sectors.
Three Good Reasons for Europe
Vincenzo Vedda, Chief Investment Officer at DWS, cites three arguments in favor of Europe[3]:
No 1 - Diversification: Reducing the heavy U.S. weighting in many portfolios helps avoid concentration risk.
No 2 - Valuation: Despite recent gains, European stocks remain cheaper than U.S. ones. In June, the forward P/E ratio for the S&P 500 was 22, compared to just 15 for the Euro Stoxx 50.[4]
No 3 - Cyclicals: Europe has a higher share of cyclical companies (e.g., industrials, consumer goods, construction), which tend to benefit early in economic recoveries.
“Europe currently offers better opportunities than the U.S.: Germany is taking a new, forward-looking fiscal path. Rising defense spending is stimulating the economy, and in times of global uncertainty, legal stability and rule-of-law markets Europe is seen as a reliable investment destination.” — Philipp Schweneke, Co-Head of European Equities, DWS
Don’t underestimate the risks
Of course, there are risks. A global economic slowdown could also impact European markets. Additionally, any escalation in trade tensions between the U.S. and Europe could have unpredictable consequences.
Conclusion
The momentum is shifting toward Europe: attractive valuations, improving economic prospects, and stable legal frameworks make European stocks particularly appealing. Increasing the European share in a portfolio can also reduce concentration risks caused by the dominance of U.S. stocks. Whether through actively managed funds or targeted ETFs—daring a little more Europe could pay off in the long run.