Stock market euphoria ? - July 15, 2025

Buoyed by concrete developments and a resolutely positive narrative, have European stock markets already become too expensive? An in-depth analysis suggests not, especially as the economy could emerge from its slump by 2026.

Supported by the German budget revolution, the ECB's rate cuts, and global investors' quest for diversification outside the US, European equities have posted remarkable performance since the beginning of the year, both in absolute and relative terms: +16.1% for the MSCI EMU (including dividends), compared with +7.6% for the MSCI USA (as of July 10, 2025). This is all the more remarkable given that the outlook for corporate earnings growth in 2025 has deteriorated, in line with downward revisions to global growth for the year.

In this context, valuations —particularly the P/E ratio (price/earnings ratio) — have risen significantly. This has fueled fears among some observers of excessive optimism, or even stock market “euphoria.” At more than 15 times expected earnings for the next 12 months, the P/E ratio of the flagship Euro Stoxx 50 index (cf. chart 1) is at levels rarely seen since 2006. It has only been higher on two occasions: briefly in early 2015, during the euphoria caused by the ECB's historic shift to “QE” (massive purchases of public and private debt), and then during the Covid-19 crisis, when profits temporarily collapsed as a result of lockdowns.

However, it could be argued that historical comparisons have their limits, given the sectoral changes in the index and the changing profitability regimes of large European caps. For example, the return on equity of Euro Stoxx 50 companies is now 13%, compared with only 10% in 2015, which puts the current valuation level into perspective.

Furthermore, by broadening the analysis to a wider universe of stocks and a longer time horizon, and by focusing on median valuations – which are less sensitive to distortions and the concentration of stock market indices – the diagnosis changes significantly (cf. chart 2). The median P/E ratio of the 220 stocks in the MSCI Eurozone Index is now in line with its 30-year historical average of 15.2, well below the 18.4 reached in early 2015. As for the transatlantic gap, it widened significantly after the war in Ukraine and remains close to record levels, with a median P/E ratio five points higher in the US than in the eurozone. This gap is no longer solely due to the “magnificent seven,” as the median masks their specific weight: it is the US market as a whole that remains expensive. If there is euphoria, it is therefore much more American than European.

Beyond stock market valuations, which we consider normal in Europe, it is also the contrast between financial optimism and gloomy economic sentiment in the eurozone that is striking. On the one hand, stock markets are rising sharply, credit spreads are very low, banks are returning to profitability, the euro is rising, and retail investors are taking more risks, as evidenced by the boom in ETFs. Added to this are initiatives – for the moment mainly verbal – in favor of a truly integrated European financial market. On the other hand, European industry remains in virtual recession, employment prospects are deteriorating, sometimes quite sharply, as in France and Germany, and consumers remain traumatized by the sharp rise in prices in 2021-2023.

We believe that this contradiction is mainly due to a time lag, as financial indicators often anticipate economic developments, with varying delays (cf chart 3). The renewed optimism among investors, the gradual recovery in bank lending, and low bond spreads are indeed good omens for the European economy, especially as the effects of the German budget plan should begin to be felt from the fall onwards. And we remain convinced that the ECB will not hesitate to step up its support if necessary.

Barring any major exogenous shocks, we therefore believe that the peak of the European financial cycle is still to come and that the economic outlook for the region will improve once the impact of US tariffs has been absorbed. With this in mind, we are maintaining an overweight position in European stocks that are most sensitive to the eurozone's economic and financial cycle in our flexible funds.