The month of January is almost over and the global financial markets have started to show what they intend to do in 2025. Generally speaking, the indices are slightly upwards, regardless of the continent. This contrasts sharply with the scenario we experienced last year. The fact remains that the performance gap between places in Europe, struggling, and in the United States, in great shape, has never been so significant. The reasons are multiple: lack of growth in Germany for two years, political and budgetary instability in France, energy prices, war in Ukraine, lack of responsiveness of the Union on strategic subjects… and in recent months, fears commercial activities linked to the return of Donald Trump to the American presidency.
Financiers are now wondering whether such a dichotomy is likely to repeat itself this year. Or if Europe will finally be able to catch up. Knowing that among the different markets of the Old Continent, France obtained the dunce’s cap with an annual decline of 2.15% in the CAC 40, when all the other places ended 2024 with an increase. The fault lies with the luxury sector (more than a quarter of the French index) and the dissolution of the National Assembly in June, which plunged the country into a political fog.
“Can Europe wake up? In the short term, the conditions to justify this awakening would be the valuation gap compared to the United States and the fact that a very dark scenario is in the prices, analysis Olivier Raingeard, investment director of Neuflize OBC. But a little more is needed: growth in the profits of European companies, a more aggressive economic policy or the establishment of a truce in Ukraine. »
Double optimism
Main stimulus capable of boosting the stock markets this year: the weapon of interest rates. “The cycle of global monetary policy easing is expected to continue in 2025, with lower interest rates supporting economic growth in the United States and the Eurozone without significantly boosting demand or reviving inflation »says Grace Peters, global head of investment strategy at JP Morgan Private Bank.
The specter of a recession thus seems to be receding and many specialists are ultimately rather optimistic, both about the prospects for American and European companies. Which was not the case at the start of 2024. “The global economy continues to grow despite the context, says Paul Jackson, global head of asset allocation research at Invesco. In the absence of a shock, given the fall in inflation, the easing of central banks, the acceleration in the growth of the money supply in the United States and in the euro zone lead us to believe that the risks of economic crisis is fading and there will be no recession in 2025. We therefore believe that the year should be favorable for the financial markets. »
In Europe, it is indeed expected that the ECB will continue to reduce its key rates. Which should have a real effect on the European economic fabric. “With the vulnerabilities brought to light by the Covid crisis, then the war in Ukraine and soon by new American trade policies, Europe will have to strengthen its economy, warns Alexandre Baradez, head of market analysis at IG France. And if this must involve common financing measures, we must never forget that the euro zone has an AAA credit rating from Fitch, Moody’s, Scope and DBRS. There is plenty to do in terms of investments and projects, if the political will is there. »
China broken down
From there to thinking that the American markets have eaten their white bread and that Europe could take its revenge this year, there is only one step that several major managers do not hesitate to take. If only in view of the valuation levels of companies across the Atlantic, they are currently being paid 22 times their 2025 earnings prospects while firms from the Old Continent do not exceed 13 times. “But a year ago, the American market was already valued much more expensive than Europe, which did not prevent its outperformance of 10 to 15 points on the European stock markets in 2024”tempers Laurent Clavel, director of multi-asset management at Axa IM.
-A gap which is largely explained by the stock market surge of the tech giants. The prices of the “magnificent seven” (Apple, Microsoft, Amazon, Alphabet, Meta, Tesla and Nvidia) have exploded, rising 65% last year, and alone account for 40% of the total rise in the S&P 500. And this lead should not be reduced immediately: “The strong performance of the Magnificent Seven is largely supported by fundamentals like earnings growth, and they show higher expectations for 2025, with continued momentum from artificial intelligence”deciphers Alexandre Drabowicz, investment director of Indosuez Wealth Management. Another strong argument is that US growth forecasts remain much higher for this year and next than those of Europe.
This match between the United States and the Old Continent has almost pushed the rest of the world, particularly emerging economies, into the background. Starting with the first of them, China, which risks seeing its growth rate fall below 5% in 2024, its lowest level since 1990, and continuing to decline in 2025 and 2026.
Very impacted by Covid-19, the country is unable to bring its economy back to pre-pandemic levels. “The stimulus measures adopted by the authorities aim to get China out of its economic and deflationary slump, but long-term uncertainties remain”warn the Tikehau Capital teams: crisis of confidence among the population and domestic consumption at half mast despite the lifting of anti-Covid restrictions, real estate bubble, etc.
Dollar dependence
And as if that wasn’t enough, there is the shadow of Donald Trump. The new president of the United States has been threatening a trade war for months. “I am going to impose tariffs on the outside world, which will have to pay for the privilege of coming and stealing our jobs and our businesses, which they have been doing for years and years”he trumpeted during a campaign rally on November 4. With a privileged target, since it could increase taxes by up to 60% on all products coming from China, to reduce the trade deficit that the world’s largest economy has with the second.
This punitive measure could, conversely, benefit other emerging countries (Vietnam, South Korea, Indonesia, etc.), but especially its great Indian rival. The giant led by Narendra Modi has overtaken China in number of inhabitants for two years, it displays annual economic growth which should flirt with 7% and is increasingly attracting foreign investment.
However, all these emerging markets remain very dependent on the dollar. If the greenback strengthens, as was the case last year, this will automatically increase the prices of raw materials but also the debt burden of these countries, a good part of which is held by international investors. And this is indeed denominated in dollars, not in local currency. America is truly on all fronts!
