WeekWatch

While US equities are consistently in the headlines, European equities have been quietly stealing the show. Does this mean it’s time for investors to take a look closer to home?

In the year to date, the MSCI ex UK has risen 7.90%. Over the same period, the S&P 500 increased by just 1%. Widespread geopolitical volatility and President Trump’s back and forth on global trade tariffs have played a role in the US’s relative underperformance. Many investors have moved away from US equities, or decreased holdings, in favour of stock markets in Europe instead.

But these are not the only drivers. The fourth quarter of last year saw strong corporate earnings from European companies. The yield on European equities is notably higher than on US equities, 3.1% compared to 1.4% for the S&P500.

Meanwhile in March German politicians approved the creation of a € 500 billion (£420 billion) defence and infrastructure fund. And, earlier this month, NATO leaders agreed to boost defence spending to 5% of their countries’ economic output by 2035. This will further reinforce the strength of the defence sector if met.

Unsurprisingly Industrials (Defence) is a key sector driving the positive returns on European equities. Financials (Banks), Communication Services (Telcos), Utilities and Construction Materials (e.g. Cement) have all also performed strongly.

Valuations and returns

Another potential attraction of European equities versus US equities lies in average valuations, which are significantly lower than their US counterparts.

James Courtman, SJP’s Head of Equities, points out that at the start of this year, European equities were trading at their largest valuation discount to the US in at least 20 years. Even after the recent outperformance they remain at a large discount, albeit are not extremely cheap in absolute terms.

He adds: “Lower starting valuations tend to correlate with high future returns. Significantly lower valuations in Europe suggest the market is already pricing in a less positive outlook for European equities.”

“Another way to think about this is that European markets are more 'fragile' to incrementally positive developments. In contrast, US markets are pricing in less risk / more positive future expectations to a much greater extent and are thus more fragile to incrementally less positive developments.”

While it is difficult to know which approach is right or wrong, or to what extent, it underlies the value of diversification for investors.

James says: “It makes sense for investors to have exposure to European equities as part of a diversified portfolio. We have a positive asset allocation view on European equities within the equity component of our multi asset funds and many of our active managers are finding attractive investment opportunities in Europe.”

A US or European approach?

European equities have benefited from negative sentiment towards the US in recent months. Investor surveys have highlighted this shift away from the US and towards international markets including Europe.

Yet despite the strong start to the year for European equities, it is far too soon to write off the US market. Over the longer-term European equities have significantly underperformed US equities. There has been a prominent narrative of US exceptionalism, led in large part by the Magnificent 7 dominating markets by size and returns.

While investors have been showing some enthusiasm for European equities of late, “It usually takes a material and prolonged reversal of performance for investor behaviour to change meaningfully, in terms of shifting their portfolio exposures,” says James.

Looking at the last few days alone highlights the importance of ‘shutting out the noise.

Last week US markets reached record highs. The S&P 500 added 3.4% over the week, hitting 6,173.07 on Friday – the first new record high since mid-February. Meanwhile the NASDAQ also scaled record levels. It came after progress between the US and China on trade talks. There was also a de-escalation of tensions in the Middle East.

Europe – and tariffs

Could a potential cloud on the horizon could be the fact that Europe has still not signed any major trade deals with the US?

Given the volatility of the ongoing tariff situation, James advises ‘tuning out from the noise’.

“There is always a geopolitical or macroeconomic issue grabbing headlines – it is by and large impossible to predict how it will evolve, what the implications will be and how markets will react given their complex adaptive nature. Over the long term it tends not to be as important as it seems in the moment.”

Global markets

Japanese markets bounced strongly, the Nikkei 225 jumping by +4.6% (in yen terms) with the index’s technology stocks amongst the best performers. Meanwhile in China, the Shanghai Composite advanced by +1.9% (local currency), reflective of the positive trade announcement with the US.

UK equities were somewhat more muted, the FTSE100 concluding the week just +0.3% higher.

2025 has been nothing if not eventful. From dramatic swings in US tariff policy to the Middle East nearing the brink of war, world events have proved difficult to predict so far this year.

Investment markets traditionally don’t like uncertainty, and 2025 has seen an elevated level of volatility in equity markets.

As an investor, what should you do in these times?

Joe Wiggins, SJP’s Head of Research, notes: “The chances of people making really bad decisions in these types of environments is high.” This is why we have an SJP checklist for geopolitical risks to serve as a reminder and to avoid an emotional response amid times of high uncertainty. We ask ourselves the following five key questions:

1. Do we have confidence in predicting the outcome of the current situation?
2. Do we believe we can predict the financial market implications of the outcome?
3. Are any of the financial market impacts likely to be material over our long-term investing horizon?
4. Are our portfolios appropriately diversified for a range of different outcomes?
5. Has there been any change to our investment objectives because of this uncertainty?

So how do we answer these? It is incredibly difficult to know how such geopolitical tensions will resolve, and over what period. We acknowledge the need to remain humble about our investment edge. It is not in predicting the actions of multiple parties in a complex geopolitical situation. Indeed, no one can be confident in such predictions. Similarly, predicting the financial market implications is highly challenging. Any number of macroeconomic or idiosyncratic factors could dominate market movements across different asset classes.

It is also worth bearing in mind our investment horizon is long term in nature. The market impacts over this time frame are unlikely to be material. History has shown such events usually have a short-term influence.

Given the elevated levels of political uncertainty regarding trade, tariff and fiscal policy, for some time we have been emphasising the importance of diversification to bolster portfolio resilience. This is an area of ongoing focus for us. Chiming with our long-term investment horizon, our investment objectives have not changed.

Joe adds: “The temptation to try and predict outcomes or to overstate the importance of what’s happening from a financial market is high at times like this. Instead, this is a time to have cool heads.”

The value of an investment with  St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.