European stocks' 2025 outperformance is over, but don't forget the euro

Key Points

• It seems likely that European stocks' outperformance in 2025 has ended, with recent data showing they are performing similarly to U.S. stocks, though there is some debate on the extent of this shift.

• The evidence leans toward the euro strengthening significantly, up 14% against the dollar year to date, which impacts stock valuations and investor returns, particularly for U.S. investors.

• There is controversy, as the strong euro could benefit U.S. investors by making European stocks cheaper, but it may hurt European companies' competitiveness, affecting broader market dynamics.

Overview

European stocks showed strong performance early in 2025, particularly in the first quarter, but recent trends suggest this outperformance has waned. The euro's strength remains a critical factor, influencing how investors view European equities, especially in cross-border investments.

Performance Analysis

Research suggests that European stocks, as measured by indices like the STOXX 600, outperformed U.S. stocks like the S&P 500 in early 2025, with a lead of up to 10 percentage points in March. However, as of July 7, 2025, the STOXX 600 is up 6.6% year to date, while the S&P 500 is up 6.8%, indicating a convergence. The EU50 index, a key Euro Area benchmark, has declined 2.25% over the past month, though it remains 6.21% higher than a year ago, suggesting a slowdown in momentum.

Euro's Role

The euro has strengthened significantly, reaching a near four-year high and closing in on $1.20, up 14% against the dollar year to date. This makes European stocks more attractive to U.S. investors, as they appear cheaper in dollar terms, with the STOXX 600 hitting an all-time high in late June when priced in dollars. However, for euro-based investors, the strong euro reduces the appeal of U.S. assets, with the S&P 500 being 9% off its February peak when priced in euros.

Supporting URLs:

• Investing.com: European stocks’ 2025 outperformance is over, but don’t forget the euro

• Trading Economics: Euro Area Stock Market Index (EU50)

• Reuters: The big currency winners of 2025 so far do not include the dollar

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Comprehensive Analysis of European Stocks' 2025 Performance and the Euro's Impact

This note provides a detailed examination of the recent reports, dated July 7, 2025, indicating that European stocks' outperformance in 2025 has ended, while emphasizing the continued significance of the euro's strength. The analysis is informed by recent news articles, market data, and expert opinions, ensuring a thorough understanding for professional colleagues.

Event Overview

On July 7, 2025, an article from Investing.com titled "European stocks’ 2025 outperformance is over, but don’t forget the euro" highlighted that while European equities had a strong start to the year, their outperformance relative to U.S. stocks has diminished. This development coincides with the euro reaching a near four-year high, up 14% against the dollar year to date, which continues to influence market dynamics. The current analysis, based on data up to July 7, 2025, at 01:59 AM PDT, reflects the latest market conditions and trends.

European Stocks' Performance in 2025

European stocks, as represented by major indices such as the STOXX 600 and the EU50, demonstrated significant outperformance in the early part of 2025. Articles from Forbes, dated March 30, 2025, and Goldman Sachs, dated March 12, 2025, noted that European equities surged ahead of U.S. counterparts in Q1 2025, with the STOXX 600 rising 20.5% in the first quarter compared to the S&P 500's 1.7% gain. Morgan Stanley, in a February 25, 2025, article, highlighted that the MSCI Europe Index rose roughly 9% over the past three months, beating the S&P 500's 0.5% gain, driven by improving economic activity and supportive policies.

However, recent data indicates a slowdown. The Investing.com article, published on July 7, 2025, reports that as of Friday’s close, the STOXX 600 is up 6.6% year to date, while the S&P 500 is up 6.8%, narrowing the performance gap. Trading Economics data, updated on July 3, 2025, shows the EU50 index fell to 5289 points on July 4, 2025, losing 1.03% from the previous session and declining 2.25% over the past month, though it remains 6.21% higher than a year ago. This suggests that the earlier outperformance has waned, aligning with expert opinions from UBS Asset Management’s Max Castelli, who noted in the Investing.com article that the "big period of European assets outperformance over U.S. might be over."

Index	Q1 2025 Performance	YTD Performance (as of July 7, 2025)	1-Month Change (July 2025)
STOXX 600	+20.5%	+6.6%	Not specified
S&P 500	+1.7%	+6.8%	Not specified
EU50	Not specified	Not specified	-2.25%

This table summarizes key performance metrics, highlighting the convergence in year-to-date returns and recent declines in the EU50 index.

The Euro's Strength and Its Impact

The euro has been a significant factor in 2025, with multiple sources confirming its strength. Reuters, in an article dated March 14, 2025, reported the euro posting its biggest weekly gain versus the dollar since 2009, up 5% and reaching around $1.09, with forecasts from BofA seeing further gains to $1.15 by end-2025. More recent data from Trading Economics, updated on July 3, 2025, shows the EUR/USD exchange rate at 1.1747 on July 7, 2025, down 0.20% from the previous session but up 2.85% over the past month and 8.46% over the last 12 months. Capital.com, in an analysis dated July 4, 2025, noted the euro expected to stay ‘moderately bullish’ in the second half of 2025, supported by eurozone resilience and ECB rates at 2%, with EUR/USD above 1.17, its highest since September 2021.

The Investing.com article details the impact: the euro's 14% rise against the dollar year to date has made European stocks cheaper for U.S. investors, with the STOXX 600 hitting an all-time high in late June when priced in dollars, despite being shy of March’s record in local currency. For euro-based investors, the currency ate up U.S. assets’ returns, with the S&P 500 9% off its February top when priced in euros. This dual effect was echoed by DWS’ Madeleine Ronner, who noted that the currency move makes Wall Street more expensive from Europe, potentially worsening any U.S. market downturn when viewed in euros.

Euro Performance Metric	Value (as of July 7, 2025)
EUR/USD Rate	1.1747
YTD Change vs. USD	+14%
1-Month Change vs. USD	+2.85%
12-Month Change vs. USD	+8.46%

This table summarizes the euro's recent performance, highlighting its strength and relevance to stock market dynamics.

Market and Economic Context

The shift in European stocks' performance aligns with broader economic trends. The European Commission's Spring 2025 Economic Forecast, dated May 18, 2025, projects real GDP growth at 1.1% in the EU and 0.9% in the euro area, a downgrade from earlier forecasts due to increased tariffs and U.S. trade policy uncertainty. Articles from Schwab, dated June 5, 2025, and Morningstar, dated May 27, 2025, suggest that global market volatility and tariff uncertainties have prompted investors to look overseas, but recent data indicates a cooling in European equity leadership. The strong euro, while beneficial for U.S. investors, adds pressure on European exporters, as noted in a Reuters article dated April 28, 2025, which warned that a sustained 10% rise in the euro could shave 2-3% off corporate earnings, exacerbating tariff-related challenges.

Expert Opinions and Implications

Expert opinions, as cited in the Investing.com article, reflect a nuanced view. Max Castelli from UBS Asset Management suggests that while U.S. exceptionalism may not return with the same strength, the period of significant European outperformance is likely over. Madeleine Ronner from DWS highlights the currency impact, noting that a stronger euro makes U.S. assets less attractive for European investors, potentially amplifying any U.S. market downturns. This duality underscores the importance of considering currency effects in investment strategies, particularly in a year marked by geopolitical and trade policy shifts.

Conclusion

In summary, research suggests that European stocks' 2025 outperformance has ended, with recent data showing year-to-date returns aligning closely with U.S. stocks, and the EU50 index declining over the past month. However, the euro's significant strength, up 14% against the dollar, remains a critical factor, making European stocks more attractive to U.S. investors while posing challenges for European companies' competitiveness. This dynamic warrants close monitoring, especially given the potential for currency impacts to influence future market performance and investor sentiment.

Supporting URLs:

• Investing.com: European stocks’ 2025 outperformance is over, but don’t forget the euro

• Trading Economics: Euro Area Stock Market Index (EU50)

• Reuters: The big currency winners of 2025 so far do not include the dollar

• Forbes: European Stocks Surge Ahead Of S&P 500 In Q1 2025

• Goldman Sachs: Why European stocks are outperforming the US

• Morgan Stanley: European Stocks Rally 2025: Will It Last?

• Trading Economics: Euro US Dollar Exchange Rate - EUR/USD

• Capital.com: Euro to dollar forecast: Third-party price target

• Reuters: Unexpected euro surge adds to Europe Inc's tariff misery

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