MW Despite tariff fears European stocks have outperformed Wall Street this year. Here's why UBS thinks that will continue.

By Jamie Chisholm

Meager valuations have long been supportive of European stocks, but now there are new factors to help the rally

It's Valentine's Day, and love is most definitely in the air for European stocks.

Consider these numbers. The STOXX Europe 600 index XX:SXXP closed Thursday at a record high, up 9.1% already this year. Germany's DAX index DX:DAX also hit a fresh peak, up 13.6 in 2025. The continent's biggest market cap tech company, Germany's software giant SAP (XE:SAP) $(SAP)$, has jumped 18.6% over the same period. Meanwhile, Wall Street's S&P 500 SPX is up 4%.

Here's two more important numbers. The forward price to earnings ratio for the S&P 500 is 22.1, while the STOXX Europe 600's is just 14.3, according to FactSet.

That large valuation differential is one of the main reasons why, despite looming tariffs and economic stagnation in the region's biggest economies, many analysts are happy to say: keep buying Europe. "Europe is no longer a value trap," says the editorial board at BCA Research.

But Andrew Garthwaite, UBS global equity strategist, notes that though supportive for European stocks, the valuation gap has lingered for many yeas.

Other factors that have been underpinning European equities for a while are the prospect of further interest rate cuts by the European Central Bank; nascent signs of improvement in the eurozone's purchasing managers surveys; and an overall yield (dividend and buybacks) that is 1.3 percentage points above that of the U.S. having historically been 0.8 percentage points below.

So, with those in mind, Garthwaite has laid out the factors he considers new, and which cause him to place an 'overweight' rating on Europe.

First is UBS's composite scorecard (below), which ranks a market's attractiveness using monetary conditions, economic momentum, valuation, investor positioning, regional risk appetite and sensitivity to macro scenarios.

Europe has moved up to second place. "The slippage in the U.S. and improvement in Europe is largely on the back of moves inrelative earnings revisions and relative risk appetite," says Garthwaite.

Second, earnings revisions for Europe are turning upward relative to global peers, but markets are discounting a fall in the former's earnings momentum, he says.

In addition, further weakness in the euro - UBS sees it falling to $0.99 by the end of 2025 - would be consistent with improving earnings revisions. A 10% fall in the euro may increase European earnings per share by about 9%, UBS reckons.

Next, there will be less fiscal tightening in the continent's two biggest economies than had been feared. The German election on Feb. 23 may deliver a government that delivers a fiscal easing of 0.7% of GDP, while in France the recent budgetary tightening was 0.6% of GDP, notably less than the 1.1% that had been recently proposed.

Finally, current headlines suggest the increased possibility of a cease fire in Ukraine. It's the market's job to look at the business implications of this and Garthwaite reckons there will be opportunities for companies from a rebuild of the shattered country that could cost around $600 billion, or about 3% of eurozone GDP.

"There could be a Marshall-style plan or common bond type plan (similar to the EU Recovery Fund) to fund this," he says.

A cease-fire would likely also lower European energy prices. The UBS energy team thinks the region's natural-gas price could fall by more than half on a deal that allowed Russian gas to flow again. Any partial re-engagement with Russia would benefit companies that still have exposure even if it has been written off, according to UBS.

"To us on the global equity strategy team we think that a cease fire in Ukraine would have a big sticker effect potentially on confidence as both the consumers and corporates know they are over the energy shock. It is also a reason for U.S. funds in particular to re-engage in Europe," says Garthwaite.

One big risk to its overweight Europe call is if across the board tariffs of 10% are imposed on Europe's exports to the U.S., and if China's economy deteriorates.

Still, UBS says buy these stocks which are cheaper and better than their peer group (U.S. listing tickers included if available). Essity (SE:ESSITY.B) $(ETTYF)$, Schneider (FR:SU), Siemens (XE:SIE), Intesa Sanpaolo (IT:ISP) (ISNPY), Erste (AT:EBS) (EBKDY), Ryanair (IE:RYA), and Zalando (XE:ZAL) (ZLDSF). A Ukrainian cease fire basket also includes Stora Enso (FI:STERV) (SEOAY), easyJet (UK:EZJ) (ESYJY), Coca-Cola HBC (UK:CCH) (CCHGY), Wizz Air (HU:WIZZ) (WZZAF) and LPP (PL:LPP).

U.S. investors can replicate the DAX using the Global X DAX Germany ETF DAX and can get a broad exposure to Europe with the iShares Core MSCI Europe ETF IEUR.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are moving lower, with benchmark Treasury yields BX:TMUBMUSD10Y also dipping. The dollar index DXY is down, while oil prices (CL.1) hover just a dollar or so above the year's low and gold (GC00) is trading around $2,959 an ounce.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              6115.07    0.52%  2.99%   3.97%   21.58% 
   Nasdaq Composite                                                     19,945.64  0.78%  3.14%   3.29%   25.40% 
   10-year Treasury                                                     4.532      3.60   -9.80   -4.40   24.79 
   Gold                                                                 2963.5     2.67%  8.16%   12.28%  46.32% 
   Oil                                                                  71.55      0.69%  -7.53%  -0.45%  -8.55% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

U.S. economic data due Friday include retail sales for January alongside the import price index for the same month, both released at 8:30 a.m. Eastern.

Industrial production and capacity utilization for January are published at 9:15 a.m., followed at 10:00 a.m. by January business inventories.

GameStop shares $(GME)$ are up 7% after a report the original meme stock is considering an investment in bitcoin.

Shares of Roku $(ROKU)$ and Airbnb $(ABNB)$ are both up around 13% after the two companies delivered well-received earnings after Thursday's close.

TikTok has been restored to the Apple and Google app stores.

Dallas Fed President Lorie Logan is due to speak at 3:00 p.m.

U.S. markets will be closed on Monday for the President's Day holiday.

Best of the web

How a resurgent Walmart saw off the Amazon threat.

Hedge fund startup that replaced analysts with AI beats the market.

How the Trumps turned an election victory into a cash bonanza.

The chart

Inflation is moving higher, inflation expectations are moving higher, and breakevens are moving higher, notes Apollo chief economist Torsten Sløk, who provides the chart below that shows inflation performance now and in the 1970's. The breakeven inflation rate is a market-based measure of expected inflation.

"If the Fed cuts interest rates too early, it increases the likelihood that we will see a repeat of the 1970s. The Fed has no other options than to keep interest rates higher for longer," says Sløk.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   GME     GameStop 
   NVDA    Nvidia 
   PLTR    Palantir 
   INTC    Intel 
   BABA    Alibaba 
   TSM     Taiwan Semiconductor Manufacturing 
   SMCI    Super Micro Computer 
   AAPL    Apple 
   HOLO    MicroCloud Hologram 

Random reads

Donkey zebra in Chinese zoo.

Kayaker swallowed by whale.

Here's when the world will end, according to Sir Isaac Newton.

-Jamie Chisholm

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 14, 2025 06:31 ET (11:31 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.