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European stocks are on course to outpace other major global equity markets this month, as fears of sweeping US tariffs subside and investors flee the shakeout in Wall Street technology stocks.
The Stoxx Europe 600 index has risen 6.6 per cent so far in January, its best monthly performance in two years. The US’s S&P 500 index has gained 3.2 per cent, while Japan’s Topix is up 0.1 per cent.
London’s FTSE 100 index rose to a fresh record high on Friday and is up 6.2 per cent so far this month, its best monthly performance since November 2022, when markets rebounded following then prime minister Liz Truss’s ill-fated “mini” Budget two months earlier.
The gains have sparked renewed hopes of a sustained revival in the region’s equity markets. While some have at times performed strongly — Germany’s Dax rose by nearly one-fifth last year — as a whole Europe has lagged well behind the US over the past decade.
“After so many years of underperformance, not much needs to happen before everyone becomes excited . . . Everyone is getting warm about Europe,” said Roland Kaloyan, a strategist at Société Générale.
Investors piled into US stocks last year amid excitement about the growth of artificial intelligence, with a small group of tech stocks once again driving gains.
At the same time, US President Donald Trump’s tariffs threats weighed on Europe, which sends roughly one-fifth of its exports each year to the US, while homegrown political crises in countries such as France diminished investors’ appetite for bonds and equities alike.
But January saw the biggest rotation from US stocks into Eurozone stocks in almost a decade, according to Bank of America, as investors fled richly valued tech stocks in favour of European defensive and growth stocks, including banks, pharmaceuticals and luxury retailers.
This week’s global tech sell-off sparked by Chinese start-up DeepSeek’s advances in artificial intelligence has only accelerated this shift, analysts said.
After the AI wobbles, “investors have been moving towards . . . Europe”, as the region has less exposure to technology stocks, said Mohit Kumar, an economist at Jefferies.
In addition, Trump’s softer stance on tariffs — he has threatened 25 per cent duties on goods from Mexico and Canada from February 1 but as yet has failed to hit the euro area with levies — has come as a relief to investors.
“Expectations for Europe were on the floor,” said Sharon Bell, an equity analyst at Goldman Sachs. “This has changed.”
After years of underperforming Wall Street, European shares are also trading near their widest valuation discount to the US since at least the late 1980s, according to data from Société Générale. The UK market in particular has benefited from low valuations, say analysts.
“I have been quite surprised by the increased interest in UK equities, it is probably because the growth expectations are pretty high compared to the rest of Europe,” Bell said.
“And obviously it is cheap. It could also be seen as a hedge against tech . . . for diversification.”
The strong performance of European stocks comes even as the Eurozone struggles to recover from a sharp rise in energy and food prices triggered by Russia’s full-scale invasion of Ukraine, while the US economy continues to grow strongly. Data this week showed the Eurozone economy unexpectedly stagnated in the fourth quarter.
However, the prospect of further interest rate cuts by the European Central Bank may cheer investors, analysts said. In the US, markets believe inflationary pressures will force the US central bank to keep rates higher for longer.
“If the market starts to freak about inflation in the US that will also be more positive for European equities in comparison,” said Jefferies’ Kumar.
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