In an nutshell
After Europe’s strong outperformance, justified by fundamentals and valuations, we have no regional preference for the time being.
Europe is still cheaply valued, but the US is now getting a tailwind from a weaker US dollar and a narrowing of the interest rate differential with Europe. Emerging market equities remain attractive as a complement.
Strong, stronger, Europe
As we suspected, the positioning and consensus for US stocks after the Trump election were overly positive. In the first quarter, there was a significant countermovement: Europe outperformed the US by more than 17 percentage points in euro terms. While Europe recently saw positive earnings revisions, US companies, on aggregate, experienced negative earnings revisions. Many indicators point to a slowdown in US growth in the spring. The rally was therefore fundamentally justified and was supported by the relatively extreme positioning of investors, which was also reflected in relative valuations. However, not only the US but also other regions, such as Japan, recently experienced setbacks. Somewhat surprisingly, European small caps have so far barely benefited from the shift in sentiment, which is likely due to the lack of capital inflows into this segment.
Can Europe continue to outperform?
Foreign investors have so far barely participated in the recovery rally. Based on fund flows, Bank of America estimates that only 4% of the outflows since Russia's invasion of Ukraine have returned to Europe. According to brokers, interest in Europe remains low in Asia. The valuation discount between Europe and the US, based on the price-to-earnings ratio, still exceeds 30%.
If investors were to genuinely believe in a sustained turnaround for Europe, the sentiment-driven rally could turn into a structural catch-up phase. Ironically, Donald Trump may play a significant role in this – by forcing Europe to become more self-reliant and invest more.
Let's not forget: Over the past fifteen years, European fiscal policy has oscillated between austerity measures and government spending focused mainly on social or environmental goals – both of which contributed to a loss of global competitiveness. Insufficient investments, burdensome regulations, a declining population, weak productivity, and, more recently, rising energy prices have exacerbated these issues. As a result, the prevailing narrative has been that, unlike the dynamic US with its better demographics and fiscal support, Europe has little room for growth. However, Germany's massive rearmament and investment package may now change that.
Not only because it is likely to lead to more growth and rising profits for many companies, but also because it could trigger a shift in sentiment and thus bring capital inflows into Europe. After all, the stock market is driven by psychology. A significant part of the US outperformance in recent years has been due to valuation expansion (i.e., psychology), driven by the notion of US exceptionalism. The recent underperformance is also linked to the fact that Trump – like many new presidents – has started with unpopular, growth-dampening measures: austerity, reduced immigration, and tariffs. Growth-friendly policies, such as deregulation and (an extension of) tax cuts, are likely to follow later.
Historic Quarter: DAX outperforms S&P 500 by more than 20 percentage points in euro terms in the first quarter so far
Neutral regional positioning towards Q2
Whether Europe can continue to outperform the rest of the world will likely depend on further political actions and how it is perceived abroad. Additionally, other regions, such as the US which has been negative in euro terms since the start of the year are expected to improve at least in absolute terms. The emerging weakness in US growth is already partially priced in, and the outlook should improve towards the second half of the year. Moreover, the relative tailwind for European companies from lower interest rates and a weak euro has recently diminished significantly. We have recently increased our allocation to emerging market equities, as the announcement of DeepSeek has sparked interest in undervalued Asian tech companies. Additionally, China, like Europe, has implemented significant economic stimulus measures – partly in response to US tariffs. Against this backdrop, we currently feel comfortable with a neutral geographic positioning. Volatility is likely to remain high due to major macroeconomic shifts and Donald Trump's unpredictability, presenting both risks and opportunities.
Is the US dominance of the last 20 years coming to an end?
Development of trade-weighted US dollars and relative performance of MSCI USA against MSCI AC ex USA, normalised: 1.1.1988 = 1
Forecast overview: upside potential until the end of the year
Comparison of the Berenberg and consensus forecasts, figures as of year-end 2025 and mid-2026
Politics and AI are creating uncertainty
Our discussions with companies over the past quarter have been dominated by order books, AI and politics. We are seeing increasing uncertainty and caution among companies across all sectors due to the current very dynamic US policy on tariffs. In industry, inventory levels have continued to normalise in recent months. In the automation sector in particular, we are now seeing a bottoming out, which should lead to a new upturn. Industrial companies with a focus on data centres continue to report good growth figures, but are disappointed with the outlook and new orders. Technology companies also disappointed relative to their strength in previous quarters, and the size of the positive earnings surprise narrowed significantly. The DeepSeek news has created a lot of uncertainty for semiconductor manufacturers, while many software companies should benefit from potentially lower application costs. Otherwise, companies in the luxury goods sector surprised on the upside, driven by consumer sentiment in the US. However, a significant recovery in end markets is likely to take some time. In healthcare, we are seeing an increase in orders and a recovery in the life science end markets after a difficult few years.
Matthias Born, CIO Equities
Author
Ulrich Urbahn
Ulrich Urbahn has been working for Berenberg since October 2017 and is responsible for quantitative analyses and the devel-opment of strategic and tactical allocation ideas, and is involved in capital market communications. He is a member of the Asset Allocation Committee and portfolio manager of the Berenberg Variato. After graduating in economics and mathematics from the University of Heidelberg, he worked for more than 10 years at Commerzbank, among others, as a senior cross asset strate-gist. Mr Urbahn is a CFA charterholder and was part of the three best multi-asset research teams worldwide in the renowned Extel survey for many years.
Ulrich Urbahn
Head of Multi Asset Strategy & Research