Investment Strategy
May 20, 2025
Rattled by tariffs? Four reasons to explore European stocks now
Fears about tariff policy, growth and inflation have recently reversed the longstanding outperformance of U.S. stocks compared to their global peers, and affected the dollar and interest rates. This combination of events is making some investors skeptical about the future of U.S. market exceptionalism. As a result, many investors are now looking for investment opportunities that can potentially offer diversification against the risks facing U.S. stocks.
We think European equities are one opportunity that deserve attention. Our mid 2026 outlook of €5,400–€6,000 for the Euro Stoxx 50, an index of blue-chip Eurozone companies, suggests potential double-digit price appreciation (excluding dividend yield and gains from currency exposure for U.S. dollar investors).
While economic and financial drivers have consistently supported U.S. equities since 2009, we think conditions have changed in ways that could make it prudent to rebalance now.. Using the MSCI World Index—an index of developed market equities—as a benchmark, we suggest clients evaluate the potential benefits of considering an allocation of approximately 30% to non-U.S. stocks, with a portion of that potentially directed towards European equities, based on individual investment goals and risk tolerance.
Here are four reasons, which we’re calling the Four Ds, that make European equities a potential option for investors who seek to diversify by geography and currency.
Defense spending and debt brakes
Europe has been underinvesting in its defense capabilities for decades. However, this trend has changed. European defense spending is expected to increase in the coming years due to a geopolitical environment that is completely different from the last 30 years, and the need to rebuild military capability after about 30 years of underinvestment.
Europe was expected to allocate 2% of its GDP to defense in 2024, but estimates suggest that an increase to 2.5% to 3.5% of GDP in the coming years is likely. The European Commission anticipates that defense investment could reach at least €800bn over the next four years1 . (For reference, U.S. defense spending was expected to reach over $950 billion, or around €849 billion, in 2024.)
The NATO summit at the end of June is anticipated to shed more light on future defense spending. The new German Chancellor Friedrich Merz recently emphasized the urgency of the situation, describing it as a "whatever it takes" moment to significantly boost defense spending. We think increased defense spending will contribute to a stronger economy in Europe.
A second factor in the stronger economy we expect recent fiscal stimulus in Germany, worth €500 billion over the next 12 years. This is a large stimulus in context of Germany's GDP of about €4 trillion in 2023. The fiscal stimulus is particularly important because it focuses on infrastructure in Germany, the largest economy in the eurozone, accounting for approximately one-quarter of the Eurozone's GDP.2
As a result of Europe’s improving domestic story, we believe that Eurozone GDP growth rate could reach 1% to 1.5% in 2026, and that Euro Stoxx earnings growth could be in the mid-to-high single digits in 2026 and 2027, thereby narrowing the gap with U.S. earnings.
Diversification
European equities provide a differentiated sector allocation relative to U.S equities. For instance, the top two sector weights in the Euro Stoxx 50 Index are financials (24%) and industrials (18%), while the two largest sectors by weight in the S&P 500 are technology (32%) and financials (14%). 3This means the two indexes are likely to perform differently in varying environments.
Secondly, foreign exchange (FX) diversification is more important now than it has been in recent years. At the end of 2024, foreign investors held about 20% of U.S. equity outstanding, almost double what they held 20 years ago. With recent volatility and policy uncertainty impacting U.S. markets, global investors are reconsidering their heavy weighting in U.S. assets. This could lead to a shift in portfolio and currency allocations.4
This year, FX has played a role in investor returns. As of May 9, the Euro Stoxx 50 Index is up 10% year-to-date in local currency terms. But because the euro has gained relative to the U.S. dollar, a USD-based investment in the index has returned over 20%.5
Discounted valuations
European equity valuations have long been lower than those of U.S. equities: Over the last 10 years, the average 12-month price-to-earnings ratio for European stocks was 14x. Currently, the Euro Stoxx 50 is trading at 15x based on 12-month forward earnings estimates. This is undemanding compared to the S&P 500, which trades above 20x forward earnings.6
We believe catalysts for change are now in place. The potential for stronger multi-year growth mean that European stocks can trade above their long-term average.
We see room for improvement in European stock valuations from today’s levels
European valuations
Source: Bloomberg Finance L.P. Data as of April 25, 2025.
Dividend yield
The European benchmark offers a dividend yield approximately 200 bps higher than the S&P 500, making these stocks potentially attractive to clients who prioritize income. The chart below shows how persistent this gap has been.
The gap in yields between S&P 500 companies and Euro Stoxx 50 companies has expanded
A sustained difference in dividend yields
Source: Bloomberg Finance L.P., J.P. Morgan Wealth Management Solutions. Data as of April 1, 2025. Past performance is not indicative of future results. You may not invest directly in an index.
Our conclusions
Years of U.S. stock market outperformance has made many clients’ portfolios overly concentrated in U.S. equities, and overexposed to the U.S. dollar. However, it’s worth remembering history: Between 1970 and the onset of the Global Financial Crisis, global equity leadership tended to cycle back and forth. There were five sustained stretches where U.S. stocks outperformed global equities (these averaged 96 months in length), and four when world markets outperformed (lasting 45 months on average).
We believe in global diversification as a strategy to optimize investment returns and manage risk across different markets. We think European equities look attractive, especially as many investors don’t have enough exposure.
We can help
For more information about European equities and how to rebalance your portfolio to add resilience in today’s complex market environment, contact your J.P. Morgan team.
1“Joint White Paper for European Defence Readiness 2030,” European Commission, March 9, 2025. https://defence-industry-space.ec.europa.eu/document/download/30b50d2c-49aa-4250-9ca6-27a0347cf009_en
2“German lawmakers approve huge defense and infrastructure spending” https://www.npr.org/2025/03/18/g-s1-54475/germany-defense-spending-merz-debt-brake-parliament
3Bloomberg Finance L.P., data as of May 9, 2025
4“Foreign Ownership of US Financial Assets: Strategic Implications,” Long-Term Strategy, J.P. Morgan Markets, May 9, 2025.
5Bloomberg Finance L.P., data as of May 9, 2025
6Bloomberg Finance L.P. Data as of May 14, 2025
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This material is for informational purposes only, and may inform you of certain products and services offered by private banking businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. Please read all Important Information.
For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material. Indices are not investment products and may not be considered for investment.
JPMAM Long-Term Capital Market Assumptions
Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only – they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations.
“Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only – they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.
The S&P 500 Index is an unmanaged broad-based index that is used as representation of the U.S. stock market. It includes 500 widely held common stocks. Total return figures reflect the reinvestment of dividends. “S&P500” is a trademark of Standard and Poor’s Corporation.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The index consists of 23 developed market country indexes and 24 emerging market country indices.
The Euro STOXX 50 Index, Europe's leading blue-chip index for the Eurozone, provides a blue-chip representation of supersector leaders in the region. The index covers 50 stocks from 11 Eurozone countries.
The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.
U.S. stocks have outperformed global peers for a long stretch, but investors are reconsidering their allocations after tariff-induced volatility. European stocks could have something to offer today.
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