Originally published at: What’s next after US equities: The European opportunity – InvestEngine Insights
For over a decade, US equities have dominated global markets. The world’s largest economy has outperformed other regions and become overwhelmingly prominent in global markets.
This long run has left many equity portfolios heavily weighted toward US stocks. This often comes at the cost of geographical diversification. Investors in ETFs that track the S&P 500 or the MSCI World Index, for example, have benefited significantly from the performance of the US stock market, which posted double-digit returns in 2023 and 2024.
Looking at the first quarter of 2025, however, the US market has lost some of its shine. US equities have struggled to keep up with high expectations, with a mix of US policy and geopolitical uncertainty weighing on investors’ US appetite.
So, it’s natural that investors would start to look for opportunities beyond the borders of the US. While the potential in emerging markets might be interesting, most investors have, so far, looked towards Europe.
The world’s second-largest economy seems to stand out for its economic strength and changing fiscal direction. European equities show notable recovery signs, supported by growing economic momentum and relatively modest valuations compared to its US counterparts.
Europe: The overlooked continent
Europe has long been overshadowed by American market performance. Are investors missing out on a powerhouse of innovation and some of the world’s best companies?
The underappreciation of Europe has had its reasons. Slowing economic growth and stagflation risks made many investors prefer the debt-fuelled (but more dynamic) economic growth story of the US.
However, this perspective might be changing. Signs of European unity are growing amid geopolitical challenges, and countries are willing to use their economic weight and fiscal possibilities to strengthen the region.
The continent is home to a number of industry champions, many of which are investing heavily in research and development. This trend is driving innovation across sectors. European export volumes grew by 3.6% annually between 2012 and 2024 – this reflects solid demand for its products and services. This is further bolstered by vibrant trade within Europe itself, representing over half of all EU commerce and creating a self-sustaining economic ecosystem.
As for what lies ahead, investors may be looking beyond Europe’s current strengths. The EU has committed to substantial investment in areas like digitalisation, sustainability, infrastructure, defence and education, positioning the continent for growth in the future.
While other regions (such as the US) focus on reducing spending, the EU is taking the opposite approach – planting the seeds for a new paradigm.
From value trap to value opportunity?
These shifts in direction are being increasingly recognised by the stock market. Recent price developments suggest European equities are beginning to reverse their long-term underperformance.
Both the German DAX and MSCI Europe have shown encouraging strength against the S&P 500 since late 2024. This could signal the start of a significant shift in market leadership. But what would this kind of reversal look like?
If we look at the short-term chart, the recent outperformance of European equities might look overstretched. However, the 15-year perspective shows how one-sided equity market returns have been. After declining relative to the S&P 500 since 2010, European stocks have substantial ground to reclaim – a gap that could take years to close.
Relative performance vs. S&P 500
Source: DWS International GmbH, Bloomberg. Past performance, actual or simulated, is not a reliable
As their potential for recovery has been around for some time already, European equities have historically led some investors to label them as a “value trap”. These are investments that appear cheap, but never fulfil their potential.
Current forward price-earnings ratios reveal that equities across German, broader European, and UK markets still trade at substantial discounts of more than 30% compared to the US market.
A case for European equity
So, why should the valuation gap between US and European equities close this time? Unlike previous years, today’s environment has undergone key changes in key areas. Europe’s pivot toward expansionary fiscal policies, supporting infrastructure, defense, and green initiatives are particular examples.
These policy changes, combined with the region’s innovation leadership as it recovers from slow economic growth, might help European companies achieve the earnings growth they’ve struggled to reach in past economic cycles.
What was once seen as a value trap could finally present itself as a genuine value opportunity. Importantly, the case for European equity exposure extends beyond potential outperformance.
After a decade of American market dominance, European equities can present compelling value based on a strong economic foundation. The recent outperformance signals what may be the early stages of a longer-term shift. By rebalancing portfolios toward this underrepresented region, investors can enhance portfolio diversification while positioning for a potential outperformance in the next market cycle.
There are several Xtrackers MSCI ETFs available here on InvestEngine that offer exposure to Europe, the European Union, the Nordics, Germany, and also World ex USA.
Glossary
Dax Index: The Dax is a German stock-market index consisting of the 40 major German companies listed on the Frankfurt Stock Exchange that have the highest trading volumes and the largest market capitalisation in free float.
MSCI Europe:
The index tracks the performance of the stocks of certain companies in European developed markets. The companies in the index are large and mid-cap companies based on the total value of a company’s free float compared to other companies. The index represents 85% of the free float of each industry in the European market. The weight of a company in the index depends on its relative size.
MSCI World Index: An index designed to measure the performance of large and mid-cap stocks across 22 developed markets, excluding the United States.
S&P 500 Index: The S&P 500 is an index that includes 500 leading U.S. companies, capturing approximately 80% coverage of available U.S. market capitalization.
Reviewed and reissued by InvestEngine (UK) Limited which is Authorised and Regulated by the Financial Conduct Authority.
Key Risk Factors
– An investment in an Xtrackers ETF may not be suitable for all investors. Xtrackers UCITS ETFs are not capital protected, therefore investors should be prepared and able to sustain losses up to the total loss of the capital invested.
– Investors should be aware that DWS Investments UK Limited, any of its parents or any of its or its parents subsidiaries or affiliates may from time to time own interests in the funds which may represent a significant amount or proportion of the overall investor holdings in the Fund. Investors should consider what possible impact such holdings, or any disposal thereof, may have on them.
– Substantial fluctuations of the value of the investment are possible even over short periods of time.
– Investments in Xtrackers UCITS ETFs involve numerous risks including but not limited to general market risks relating to the relevant underlying index, credit risks on the provider of index swaps utilised in the Xtrackers UCITS ETFs, possible delays in repayment, market fluctuations, counterparty risk, foreign exchange rate risks, interest rate risks, inflationary risks, liquidity risks, loss of income and principal invested and legal and regulatory risks.
– Movements in exchange rates can impact the value of your investment. If the currency of your country of residence is different from the currency in which the underlying investments of the fund are made, the value of your investment may increase or decrease subject to movements in exchange rates.
– Shares in Xtrackers UCITS ETFs which are purchased on the secondary market cannot usually be sold directly back to the fund. Investors must purchase and redeem such shares on the secondary market with the assistance of an intermediary (e.g. a market maker or a stock broker) and may incur fees for doing so (as further described in the prospectus). In addition, investors may pay more than the current net asset value of a share in a Xtrackers UCITS ETF when buying shares on the secondary market, and may receive less than the current net asset value when selling such shares on the secondary market.
– The value of your investment may go down as well as up and past performance does not predict future returns. Investor capital may be at risk up to a total loss.
For further information regarding risk factors, please refer to the risk factors section of the relevant prospectus and the Key Investor Information Document. The value of your investment may go down as well as up and past performance does not predict future returns. Investor capital may be at risk up to a total loss.
Important Information
Issued in the UK by DWS Investments UK Limited. DWS Investments UK Limited is authorised and regulated by the Financial Conduct Authority.
Any reference to “DWS” shall, unless otherwise required by the context, be understood as a reference to DWS Investments UK Limited including any of its parent companies, affiliates or subsidiaries and, as the case may be, any investment companies promoted or managed by any of those entities.
Xtrackers, Xtrackers II and Xtrackers (IE) plc are undertakings for collective investment in transferable securities (UCITS) in accordance with the applicable laws and regulations and set up as open-ended investment companies with variable capital and segregated liability between their respective compartments.
Xtrackers and Xtrackers II are incorporated in the Grand Duchy of Luxembourg, are registered with the Luxembourg Trade and Companies’ Register under number B-119.899 (Xtrackers) and B-124.284 (Xtrackers II) respectively and have their registered office at 49, avenue J.F. Kennedy, L-1855 Luxembourg. Xtrackers (IE) plc is incorporated in Ireland with registered number 393802 and has its registered office at 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.
DWS Investment S.A. acts as the management company of Xtrackers, Xtrackers II and Xtrackers (IE) plc.
This document is intended as marketing communication. The information contained in this document is provided for information purposes only. Any investment decision in relation to an Xtrackers ETF should be based solely on the latest version of the prospectus, the audited annual and, if more recent, un-audited semi-annual reports and the Key Investor Information Document (KIID), all of which are available in English upon request or on www.etf.dws.com.In the case of any inconsistency with the prospectus, the latest version of the prospectus shall prevail.
These marketing materials have been prepared solely for information purposes and do not constitute an offer or a recommendation to enter into any transaction.
This document has been prepared without consideration of the investment needs, objectives or financial circumstances of any investor. Before making an investment decision, investors need to consider, with or without the assistance of an investment adviser, whether the investments and strategies described or provided by DWS, are appropriate, in light of their particular investment needs, objectives and financial circumstances. Furthermore, this document is for information/discussion purposes only and does not constitute an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice.
DWS does not give tax or legal advice. Investors should seek advice from their own tax experts and lawyers, in considering investments and strategies suggested by DWS. Investments with DWS are not guaranteed, unless specified.
A summary of investor rights is available at www.etf.dws.com under “About Us – How to Complain?”.
PAST PERFORMANCE DOES NOT PREDICT FUTURE RETURNS.
© DWS Investments UK Limited 2025. 4 April 2025 Code: 25-044
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.