European Stock Markets 2025: Possibilities for a Recovery

• European stocks have been underperforming in 2024, painting a pessimistic picture of the markets’ near-term performance.
• The gap between European and global markets, particularly the US, has reached a 20-year high.
• There are four reasons why European stocks could be a potential investment opportunity in 2025 that should be watched closely.

Introduction:

European stocks are experiencing a decline in performance, both in general and in comparison, to US markets, driven by many reasons, including economic and geopolitical, in addition to internal turmoil in many countries, most notably the European giants (France and Germany).

Although the European Central Bank was able to be one of the main banks that managed to defeat inflation, when it fell to 1.7% during the fourth quarter of 2024, which enabled it to reduce interest rates to 3% levels in the last meeting of this year, the same risks still hover around the European economy, and potential risks may even join them due to concerns about US tariffs. (1)

European Stock Markets: Reality and Challenges!

Before talking about the general expectations for the European economy, it is necessary to review the current situation of European stock markets during 2024, specifically until last November.

On the MSCI Europe Index, which represents large and mid-cap companies across 15 developed markets in Europe, and covers approximately 85% of the free float-adjusted market capitalization across European developed stock markets, a significant gap can be seen in the performance of the European cumulative index compared to global indices in general, and the MSCI ACWI Index, which represents large and mid-cap companies across 23 developed markets and 24 emerging markets. (2)

This can be seen from the following graph:

As for the stoxx50 index, which measures the performance of the European stock market, and includes 50 of the largest companies in the eurozone and is one of the most prominent stock indices in Europe, we can note that it has grown by about 10% since the beginning of 2024 until November of the same year. (3)

Despite these declining performances and concerns surrounding the European economy, there are some positive indicators on the side, as the German DAX stock index rose by 21.25% since the beginning of 2024 until November.(3)

Also, the broad MSCI index of continental European stocks rose by 4.6% this year, while a similar American index rose by 29%, driven by the performance of the artificial intelligence revolution that led technology companies to reach historical record numbers. (4)

As for the euro, it fell against the dollar by about 4%, driven by many news reports and signals of the possibility of the euro itself falling to less than one dollar, reminiscent of the situation in mid-2022.(3)

 As for the European economic indicators that cast their shadows on the stock markets, it is noted that productivity continues to be weak, and the gap between it and American productivity increases, in addition to the continued weakness of investment, the decline in consumption, and the increase in the European savings rate. (5)

European Stock Markets 2025: A Different Outlook

Considering all the challenges that still surround the European economy in general, whether in terms of geopolitical tensions or clashing with customs tariffs, many analysts have begun to point to the possibility that investors will be able to seize some opportunities by searching and finding good future deals.

As for the most prominent reasons that analysts can take when they expect the improvement of European stock markets, they are as follows:

1. The historical performance of the US market:

While European stock markets were performing confusedly during 2024, US stock markets were breaking historical record levels exceeding an average of 20%. (3)

However, the improvement that affected the US market with its three indicators was due to high bets by investors and observers on the technology sector, specifically artificial intelligence, which indicates the concentration risks that Wall Street markets suffer from.

Thus; If the performance of US stocks declines for one reason or another, which is called a correction, such as if the specter of inflation returns to rise in a way that prompts the Federal Reserve to maintain high interest rates, or if the artificial intelligence sector is affected by some shortcomings or threats, this may represent an opportunity for investors to rush to search for cheap alternatives, which may be represented by European stocks.

2. Risks of Trump's financial policies:

There are many analyses that indicate the danger of the financial policies that Trump may adopt in imposing customs duties, which may affect Europe at additional levels ranging between 10-20%, which may lead to an increase in US inflation through the gateway of the high prices of imported goods, whether from China or America's most prominent trading partner, which is the European side, which will lead to interest rates on the dollar remaining high.

Because the borrowing costs on the European side are low compared to the American side, this may represent an opportunity to invest in cheap investment tools (European stocks in this case).

3. Improvement of the Chinese economy:

Since September 2024, China has taken many stimulus measures to stimulate its economy and push it to achieve the targeted growth of 5%.

With Moody's raising its forecast for China's GDP growth in 2025 to 4.2% from 4.0%, this news could be good news for the European market. (6)

China is the EU's largest trading partner in terms of imports, with around €46 billion in July, which means a potential boost to the European economy, especially given China's size and importance to certain economic sectors, such as the electric vehicle sector, the technology sector in terms of demand and the rare metals required by this important sector, in addition to the luxury goods sector, which will benefit if China's slowdown eases. (7)

4. Decrease in political tensions in Europe:

Despite the political problems in both France and Germany, any opportunity to resolve the problems in these two countries, which still represent the vital nerve of the European economy, will lead to an improvement in investment sentiment.

Germany is expected to hold early elections in February after the collapse of the coalition of German Chancellor Olaf Scholz, in addition to the fact that French President Emmanuel Macron may choose a new government that can address the budget problems.

Conclusion:

Based on the above possible reasons, investors may have the opportunity to invest in cheap European stocks that are currently offered at a good discount.

There are also many reasons that may represent another support for investors to move towards the European stock market, such as the decisions of Trump's new economic team, which may implement Trump's financial policies gradually and not all at once in a way that causes great harm to the European economy in general.

In addition, monitoring economic indicators, whether European or American, intensively and carefully is necessary to determine the appropriate timing, to seize any investment opportunity that may appear in the sky of European markets.

Resources:

1. www.forexfactory.com
2. MSCI Europe Index
3. www.tradingview.com
4. Laggard European markets may be 2025's top recovery trade | Reuters
5. The future of the euro amidst surrounding risks 
6. https://www.moodys.com

The EU's Major Trade Partners in One Chart