In the first two months of 2025, European stock markets narrowed part of their valuation gap with the US while the S&P 500 gained +/- 0%, the ATX rose by 12% YTM as of 4 March 2025, and the ATX TR – like the DAX – reached multiple all-time highs in a row. This is a somewhat surprising development, given the weaker economic momentum in the Eurozone (especially in German-speaking regions) and the new US administration, which is seen as business-friendly but critical of the EU.
One key reason for this is that the two currency blocs are in different phases of the economic cycle. While US GDP growth is slowing after a long upswing, the Eurozone economy is near its lowest point, which is a phase that typically leads to above-average growth. However, similar expectations existed at the start of both 2024 and 2023, yet they were significantly missed – especially in Austria and Germany. Why should this time be any different?
Several factors support an economic recovery: declining inflation (despite occasional setbacks), rising real incomes, dynamic regions such as Ireland and Spain, and neighboring countries like Poland. The new EU Commission's agenda includes extended transition periods for the automotive industry to meet emissions regulations, reduced ESG reporting requirements for companies with fewer than 1,000 employees, and opportunities for infrastructure and defense investments outside general debt rules. This gives governments more leeway for higher spending, particularly in Germany, where willingness to do so appears to be growing in light of the worsening geopolitical situation. Unsurprisingly, defense stocks and industry suppliers have been among the strongest performers in recent weeks.
In the US, many of these fiscal levers have already been used more extensively. Public debt levels are high, inflation is no longer declining in anticipation of new import tariffs, and interest rates remain significantly higher than in Europe. While the low tax burden theoretically allows for budget consolidation through tax increases, the current plan is the opposite. Government spending is to be partially reduced (USD 2 trillion by 2028), to help offset the planned USD 4.5 trillion in tax cuts. However, this could also dampen demand. Whether increasing tariffs will be enough to meet expectations and sufficiently compensate for tax cuts depends on the reactions of US trading partners.
Risks remain high, but so far, stock market premiums are priced accordingly. European markets still have significant potential for growth – but this will likely only materialize if the US economy remains stable.
Author:
Uta Pock
Senior Research Analyst
VOLKSBANK WIEN AG
4 March 2025
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.