U.S. equities recovery challenges European investment confidence shift
In the second quarter of 2025, European stocks have outperformed American stocks in overall returns, marking a continuation of a trend from the first quarter. This shift has been particularly evident in the S&P Europe 350 Index, which outperformed the S&P 500 by 15% in USD terms in Q1 and continued to outpace the US benchmark by another 3% in Q2.
European equities, as measured by the Morningstar Developed Markets Europe index, have gained 30.8% year-to-date as of June 20, 2025. This robust performance has been driven by a rotation from US to European equities, with strong contributors like German utilities and telecommunications companies.
While US stock indices also showed solid performance in Q2, with the S&P 500 rising roughly 10%, the Nasdaq up 17%, and Russell indices showing gains between 8-10%, European stocks have maintained their edge. However, smaller US companies, represented by the S&P MidCap 400 and S&P SmallCap 600, underperformed, being down 2% and 5% respectively year-to-date and lagging the S&P 500 by 5-8%.
Currency effects have also played a role, with the surge of the euro and pound against the US dollar further boosting the apparent relative strength of European equities.
Despite this strong performance, the region-wide Stoxx 600 in Europe has risen less than 2% in the same period. The US, on the other hand, has had more robust jobs numbers than expected, and unemployment is holding steady, despite predictions of a trade war hit.
Notably, the US has been facing pressure due to concerns over the rising American debt load. However, some investors anticipate a broader rotation away from US markets, questioning the large overweight in dollar assets.
As the Q2 earnings season progresses, it remains to be seen whether these trends will continue. Analysts at Goldman Sachs have stated that US stock valuations have become stretched, even after adjusting for the greater return on equity that US companies provide.
Meanwhile, Palantir, a data intelligence company chaired by Peter Thiel, saw an increase of more than 50% in the second quarter. Coinbase, a cryptocurrency exchange, also doubled in the second quarter as investors poured into crypto stocks.
In conclusion, while the US stock market has shown resilience, particularly in large-cap tech stocks, European stocks have demonstrated stronger performance in Q2 2025. The ongoing Q2 earnings season will be critical to sustaining these trends going forward.
Investors have shifted their focus towards European stocks, leading to an outperformance of European equities over American stocks in the second quarter. This rotational investment trend has been notable in indices like the S&P Europe 350 Index and the Morningstar Developed Markets Europe index.
Currency effects, such as the surge of the euro and pound against the US dollar, have contributed to the apparent strength of European equities. However, the Stoxx 600 in Europe has only risen less than 2%, while US stock indices like the S&P 500 and Nasdaq have shown solid growth.
Meanwhile, the US stock market has faced concerns over the rising American debt load, leading some investors to question the large overweight in dollar assets. On the other hand, non-traditional investments, such as cryptocurrency, have seen significant growth, with companies like Coinbase doubling in the second quarter.
As the Q2 earnings season progresses, analysts will closely watch whether these trends will continue, with Goldman Sachs stating that US stock valuations have become stretched despite the greater return on equity that US companies provide. The performance of European stocks, particularly Palantir’s 50% increase, will also be critical in determining the longevity of this trend.
