Europe’s undervalued equities may catch up in the Market Outlook for 2025.
After a period of extraordinary equity returns, particularly in the United States, the global market scene is now poised for a mix of promise and caution. In 2024, US equities outshone those in Europe, Japan, and emerging markets (EM) as a result of a surge post-US elections and the anticipation of a Trump-led administration promising increased economic strength.
The US economy stands out on a global scale, benefitting from a projected earnings-per-share (EPS) growth of 14.7% in 2025. However, a considerable portion of this expected growth has already been factored into the market’s pricing. The US’s performance, primarily driven by a narrow group of high-performing stocks, has led to a more concentrated S&P 500 index – a trend mirrored in the broader MSCI All Country World Index. Equal-weight strategies can offer exposure to the often-overlooked ‘forgotten 493’ stocks, helping to mitigate concentration risk while uncovering attractively priced opportunities.
Regional equity valuations offer a different outlook for investors. While the US market appears overextended, areas like EM, Europe, and Japan present relatively attractive valuations. Diversification, though not highly effective in 2024, is now more crucial than ever in 2025 to manage risk and capitalize on opportunities across regions, especially when future returns cannot rely solely on valuation expansion.
Over the past decade, the durability of fundamentals – such as consistent sales growth and margin expansion – has been the foundation of long-term equity returns. For example, US large-cap and Japanese equities have reaped the rewards of robust fundamentals. However, US large caps face possible price expansion constraints due to elevated valuations, while weaker margin improvements have held back US small caps. European equities enjoy higher dividend yields and margin expansion, yet political uncertainties have muted price momentum.
In light of Trump’s policies supporting US assets through a stronger dollar and rising yields, these factors have posed challenges for emerging market exporters. Despite the rise in protectionism, EM equities saw a modest 5% increase in 2024. Within this category, small-cap stocks have demonstrated resilience by focusing on domestic revenues, making them less susceptible to international trade disruptions and currency fluctuations – contrasting with their larger counterparts.
Germany serves as a compelling example of robust market performance despite less-than-ideal macroeconomic conditions. The DAX outperformed the broader European equity index in 2024 due to tailwinds from artificial intelligence, cloud computing, and the electrification trend. The diversified revenue base of German companies, generating over 80% of revenue internationally, has helped counter challenges faced by certain sectors.
Moreover, the underpricing of tariff risks has given European exporters a competitive advantage in domestic markets in 2025. This underpricing, combined with the Euro’s depreciation against the dollar, has made European exporters more affordable. This undervaluation has been a crucial factor driving stellar performances of many export-oriented sectors by counteracting cost pressures and driving revenue growth.
Japanese equities experienced one of their best years in 2024, buoyed by strong earnings growth and ongoing corporate governance reforms. Japan’s broad-based rally has been supported by improvements in fundamentals and a shift from industrial production to services. Corporate reforms, like the Tokyo Stock Exchange’s move for companies trading below a 1x price-to-book ratio, have propelled progress – although there is potential for improvement in governance.
Tourism in Japan has been a standout, with a surge in foreign visitors boosting the economy. Record-high wage negotiations hint at potential improvements in nominal wages, although real incomes have yet to fully rebound post-pandemic. As the Bank of Japan takes a cautious stance on rate hikes, investors may lean towards value-oriented stocks that can benefit from a stable yen and share buybacks.
In conclusion, the 2025 global equity outlook is marked by regional divergences and a changing relationship between macroeconomic fundamentals and political risks. While the US market continues to deliver robust earnings growth, its concentrated nature and high valuations introduce new risks. Conversely, emerging markets, particularly resilient small caps, and undervalued regions like Europe and Japan present compelling opportunities for diversification. Investors are advised to maintain a balanced approach that blends growth and defensive exposures, staying alert to geopolitical uncertainties and fiscal challenges.
