The market leading the charge as the US falters

After two consecutive years of 25 per cent plus returns, the US sharemarket has hit a few speed bumps in 2025.

The S&P 500 index is down 2.5 per cent so far this year, and looking wobbly as investors fret over the threat of tariffs and trade tensions.

However, as they say in investment circles there’s always a bull market somewhere and right now, that seems to be in Europe.

European shares are up ten per cent this year, led by Germany where the DAX index has surged 15.6 per cent.

That’s its best start to a year in at least a decade, but the question now is whether those gains will keep on coming.

A key reason for this robust performance has been attractive valuations.

Investors have been lukewarm on Europe for a few years now, and major indices in the region have been trading below their long-term averages.

With the US market rising more than 50 per cent during 2023 and 2024, it’s been very easy to ignore the rest of the world.

However, those stunning gains have made US share prices start to look pricey.

Excluding the abnormal COVID period, valuations (relative to earnings) have reached the highest levels since 2002.

That’s clearly skewed by the Magnificent Seven, which account for about a third of the market and have genuinely better growth prospects due to developments in artificial intelligence.

While that makes an apples with apples comparison with the past more difficult, investors are wise to assume the gains will slow from here.

This renewed interest in non-US shares has led to a re-rating of the European market, which is now trading in line with its own long-term average.

For this strong start to the year to be sustained, we might need to see a cyclical recovery in the economy, as well as much-needed some structural changes.

After a few false starts, there’s a decent chance that might happen.

We’ve seen the beginnings of a rebound in consumer confidence over the past two months, which bodes well for excess savings pile in the region.

Lower interest rates will be helping, while also spurring an increase in bank lending.

The European Central Bank (ECB) has cut its policy rate six times, from a euro-era peak of 4.0 per cent to 2.5 per cent today.

It’s expected to fall further, which could have a big impact given Europe’s traditional preference for floating rate loans.

Another potential catalyst could be a resolution to the War in Ukraine, which we’d all like to see.

That could see the return of cheap Russian gas in a boon for the manufacturing sector, which is still in contraction but is steadily improving.

Europe’s manufacturing PMI (a useful activity indicator) hit a two-year high in February, with the factory sector coming close to stabilising.

We’ve also seen a potentially game-changing announcement out of Germany in recent weeks, with leaders of the reigning political parties agreeing to abandon years of cautious fiscal policy.

Plans for a debt-funded injection into the country’s security architecture and infrastructure sector have come in response to years of underfunding, as well as question marks over America’s future commitment to assisting the region.

That’s pushed longer-term bond yields higher (and prices lower) but it’s a genuine positive for economic activity, corporate earnings and the sharemarket.

On the other side of the coin, tariffs loom large as a threat to the wider European economy.

The US imposed steel and aluminium tariffs of 25 per cent on the European Union starting this week, while the car industry is bracing itself too.

That’ll undoubtedly be a headwind for growth, although some experts believe the US could also import more from Europe in place of China, Mexico and Canada.

Tariffs could also unify Europe and drive reforms which would be great to see, as hopeful as it is.

After living in the shadow of the US for some time, the prospect of attractive returns from across the Atlantic might be looking better than they have for some time.

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