Stock Market Shift: Dax Increase Corresponds to Profit Decrease
In spite of the tumultuous economic climate, the DAX continues to outshine its American counterparts, leading investors to question whether a reversal is imminent. Are European stocks now overvalued? Is capital beginning to flow back to the USA? These questions were tackled during the ntv-Zertifikate-Talk, featuring Raimund Brichta, Patrick Kesselhut of Société Générale, and Michael Proffe from Proffe-Invest.
At present, European stocks do not seem excessively valued compared to U.S. equities, while there is a noticeable shift in capital allocation patterns in 2025, although it has not yet resulted in a substantial influx back to the USA.
Valuations and Economic Conditions:
European stocks historically trade at lower valuations than their American counterparts. For instance, the Euro Stoxx 50 currently trades at a 12-month forward price-to-earnings (P/E) ratio of roughly 15x, contrasting with the S&P 500, which is above 20x. This lower valuation makes European equities relatively undemanding.
Year-to-date through late May 2025, European indices like the Morningstar Europe Index have significantly outperformed U.S. markets, with almost 11% growth compared to nearly 9% decline for the U.S. benchmark in euro terms. Other sources also report European shares are up 8.5% versus a modest 1.1% for the S&P 500 over the first four and a half months of 2025.
The European Union's economic forecast for 2025 projects modest real GDP growth of 1.1% for the EU and 0.9% for the euro area, comparable to 2024 rates. This incremental growth suggests a sustained, moderate economic expansion rather than a bubble in equity prices.
Capital Flows: Europe vs. USA
The majority of recent capital redistribution has been from the U.S. to Europe, primarily because of valuation considerations and recently, sentiments—especially in response to policy moves from the U.S. administration.
Portfolio rebalancing has also played a part, as years of U.S. outperformance had left many portfolios heavily invested in U.S. equities. The trend suggests investors are diversifying into Europe, which has been largely overlooked and appears more attractively priced.
Whilst the recent strength of European stocks is significant, analysts warn that as valuations adjust, the U.S. could again appear more appealing. At present, however, there is no evidence of large-scale capital flowing back to the USA; instead, investments are moving from the U.S. to Europe as part of a broader value and diversification strategy.
Key Takeaways:
- European stocks do not appear overvalued under current economic conditions and in comparison to U.S. markets.
- Capital is increasingly flowing into Europe from the U.S., particularly among global investors aiming to reduce exposure to U.S. equities and the dollar.
- This trend is likely to persist in the medium term unless U.S. markets adjust valuations or become more attractive for other reasons.
In summary, there is no indication that capital is currently flowing back to the USA on a substantial scale. Instead, European equities are drawing global investment as part of a broader value and diversification play.
- In light of the current economic conditions and comparisons with U.S. markets, European stocks do not seem excessively valued, as indicated by their lower valuations and modest economic growth.
- The ongoing shift in capital allocation patterns in 2025 has resulted in a significant increase in investments in European stocks, with a trend of capital redistribution from the U.S. to Europe, primarily due to valuation considerations and diversification strategies.
