CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Indices measure the performance of a basket of securities that give traders exposure to a particular sector, like the Nasdaq does with tech, or the Dax40 does to German companies. As they are a bundle of different companies’ stocks, risk is more diversified than trading one company’s stock. Indices traders key an eye on interest rates, economic data, industry news and share performance. Understanding how indices are currently performing across different sectors and regions is critical to spotting trading opportunities. With that said, let’s find out if European will outperform US stock indices this year.
The US stock markets outperformed their European counterparts by a whopping 23 percentage points in 2024. This was the second-highest US outperformance record, only second to the 1976 performance, when the US markets soared 23.2% while the EU markets declined 6.4%. However, the inverse occurred in 1985 and 1986, when the EU markets surged 50 and 26 percentage points more than their US counterparts, respectively. Speculations that 2025 might be a Euro Area year for the stock markets are doing the rounds for several reasons.
Before diving into the factors that could support the outperformance of the European markets, recall what happened when Donald Trump won the US elections in November 2024. Most analysts lowered their forecasts for the EU markets, citing a rise in risks. Italy and France were undergoing political turmoil, while Trump had announced massive tariffs. Additionally, the manufacturing sector of the region was in a slump, especially impacting Germany, the largest economy in the EU. So, what changed?
The inflation rate in the Euro Area declined to target levels, urging the European Central Bank (ECB) and the Bank of England (BoE) to lower key interest rates. Analysts expect a 100-basis point cut in Europe in 2025. On the other hand, the US is facing the risk of a resurgence in inflation, given Trump’s tariff turmoil. This may force the Fed to keep interest rates higher, and analysts expect only a 25 basis points cut this year.
Lower rates translate into lower debt service payments for European businesses, encouraging business growth in the region. This will also create a more robust environment for consumer-facing areas, such as retail and travel. Plus, these sectors deal with domestic consumers. Little to no exposure to US tariffs translates into more stability. Lower interest rates mean more disposable income in the hands of indebted consumers, which historically boosts consumption.
The US markets trade at about 6% higher than their fair value estimates. Conversely, the European markets are roughly 5% undervalued. Small-cap and value stocks are about 30% and 20% lower than fair price, respectively. Since the markets naturally move towards closing the valuation gap, there is more upside potential for European stocks. Since low valuations create buying opportunities, investor interest in the European market is set to increase. The surge in demand has the potential to translate into more trading opportunities in the short and medium term. As of January 2025, consumer discretionary and staples stocks were trading well under fair value.
The growth of European companies comes from their exposure to the American and Chinese markets. The expectation is that the stimulus package in China and the strength of the US economy may drive sales and earnings. This could mean more growth for exporting businesses. Notably, EU companies that export to the US may be adversely impacted by tariffs. However, those with assets, employees and sales in the US may offset this with benefits from the strengthening dollar.
Donald Trump’s second term in the White House indicates oil supply will surpass demand in 2025. While the World Bank had highlighted a slump in global growth weighing on fuel demand, Trump has announced intentions to ramp up drilling in the US. The pressure on oil prices has already forced OPEC to extend output cuts to April 2025. Depressed oil prices could be a welcome relief for the EU, which has been suffering from an energy crisis since the onset of the Russia-Ukraine war. This could energise the German industrial sector and expand manufacturing output. This might spell upside for EU oil majors, such as Total Energies and BP.
As of February 4, 2025, the S&P 500 is facing the DeepSeek-driven crash, registering growth of 2.15% year-to-date. Meanwhile, the Stoxx 600 has risen 4.49%, significantly higher than its US counterpart. Notably, the Stoxx 600 has a more balanced composition, preventing shocks in a specific sector from severely impacting the overall performance of the index. The European Governing Council has decided to lower interest rates by 25 basis points, effective February 5. The FOMC, however, has decided to hold interest rates steady for now and observe the risks. If risks escalate, it may be “prepared to adjust the stance of monetary policy as appropriate.”
Maintaining a diversified portfolio and managing risk exposure are critical to optimising trading experiences. Thorough technical analysis and a robust trading strategy support a trader’s journey through market movements. Using cutting-edge tools provided by your broker to assess and manage risk can lower the chances of potential losses. Trading via contracts for difference (CFDs) is also a popular technique, since CFDs allow you to explore opportunities during market upturns and downturns. Additionally, you can trade CFDs on margin, amplifying your purchasing power and providing wider exposure to the markets. However, this also increases the magnitude of potential losses and gains. Therefore, risk management with stop loss and take profit orders is necessary. Also, with CFDs, you can take a large position in the direction you expect the market to move in and hedge it with a smaller position in the opposite direction. This technique offsets the risk of the market moving against your speculation.
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