New Chapter for Europe?: The End of US Exceptionalism

Even before US President Trump's tariff measures announced on "Liberation Day" rocked the financial markets in April, European equities were experiencing something of a renaissance. The Stoxx Europe 600 Index reached an all-time high in March, while US stocks lost ground. Even after recent price declines, European stocks are still outperforming their US counterparts this year.

Europe's stock markets took off even before the customs chaos

But the trade conflicts are putting pressure on global markets. The world must cope with the shockwaves of Trump's tariffs: Financial markets are under pressure from multiple sides, and the outlook for the global economy remains uncertain.

European companies and the European economy are exposed not only to US tariffs but also to a potential oversupply of Chinese goods originally intended for the US market. The threat of a full-blown trade war clouds the short-term outlook, but there are reasons for optimism in the long term.

Investors have increasingly turned their attention to Europe this year, particularly due to the significant valuation gap between the two markets. Historically, European equities have traded at a discount to their US counterparts. Donald Trump's re-election in November 2024 drove the already highly valued US markets to new highs. The valuation gap widened to a rarely seen level.

Since the beginning of the year, and exacerbated by the recent tariff disputes, optimism about the United States has noticeably diminished. One could argue that the notion of the United States' exceptional status was exaggerated: The US economy was boosted by massive fiscal stimulus—the US federal budget deficit is over 6 percent of GDP—which also supported consumption.

As the Department of Government Efficiency (DOGE) attempts to rein in government spending, and President Trump's proposed immigration and tariff policies raise concerns about an economic slowdown, investors are increasingly looking for alternatives to expensive US stocks.

But it's not just attractive valuations that are making Europe attractive to investors again. There are also profound macroeconomic changes that should improve the continent's long-term prospects.

“Many of the companies that benefit from a potential reindustrialization and rearmament of Europe are found in the currently unpopular value segment.”

European politicians have been forced into action by President Trump's apparent desire to reduce US military involvement in Europe. The €500 billion economic stimulus package announced by Chancellor Friedrich Merz includes investments in infrastructure and defense, as well as a relaxation of the debt brake to increase defense spending.

Immense defense spending can bring about a strong upswing

Combined with the European Union's proposal to increase joint defense spending by €800 billion, these measures could trigger a significant economic boost and sustainably change the investment climate in Europe.

From a value investor's perspective, these are particularly exciting developments. Many of the companies that stand to benefit from a potential reindustrialization and rearmament of Europe are located in the currently unpopular value segment. From steel manufacturers to cement and construction companies, many of these industries have struggled with weak markets in recent years. Now they may be at a turning point.

Another attractively valued sector that could benefit from a broad economic recovery and an increase in lending is European banks. While the European economy may suffer in the short term from US tariffs, the planned fiscal stimulus could offset this effect and provide a strong boost to the European economy in the coming years.

The value investing style has long been out of favor. Should the European economy actually stabilize and investment appetite return, these neglected market segments could once again attract more attention. Given the upcoming economic stimulus measures and the abundance of attractively valued companies, the long-term outlook for value investors appears promising.

Even after the tariff dispute, the optimistic outlook for Europe remains

The tariff disputes currently dominate headlines, and uncertainty about the future is high. However, once the situation stabilizes and the new era of global trade takes on clearer contours, investors may return to the trends that were already gaining momentum before the tariffs—particularly the recovery of European equity markets.

Given the significant valuation discount to US markets and the fundamental changes in the European economy, we are optimistic about the long-term prospects for the European region. Despite the risks posed by tariffs, recession, and the war in Ukraine, we believe a positive scenario for Europe can currently be mapped out – and we are particularly optimistic that the region's next chapter holds numerous opportunities for value investors.

About the author:

Richard Halle is an experienced value manager at British fund provider M&G. Halle manages the equity fund M&G (Lux) European Strategic Value Fund (ISIN: LU1670707527) .