Why is European stock market lagging behind the US

              

European Stocks Lag U.S. Markets as Trump’s Trade War Fears Weigh on the Euro

It’s no secret that the stock markets have been on a rollercoaster ride in recent years, but in 2024, a noticeable divide has emerged. U.S. stocks are soaring, hitting record highs, while European markets are barely keeping up. What’s behind this gap? A big part of the story is the ongoing impact of Donald Trump’s economic policies, particularly his trade war rhetoric, which is rattling Europe’s economy and leaving investors skittish. As a result, Europe’s stock performance is lagging far behind the U.S., and the euro is feeling the heat.

Why U.S. Stocks Are Soaring While Europe Struggles

In 2024, U.S. stocks surged by almost 25%. It’s a remarkable rally, especially when compared to Europe, where markets are barely budging. The Stoxx Europe 600 index, a benchmark for European stocks, has stayed mostly flat this year, and when you measure it in dollars, it’s trailing the S&P 500 by its widest margin ever. Analysts are dubbing this the "Trump premium" the idea that U.S. investors are feeling optimistic about the current administration’s policies, while European markets are grappling with uncertainty, especially when it comes to trade.

So, why this huge difference? There are few reasons.

1.  Trump’s aggressive stance on tariffs and his overall protectionist trade policies. 

Trump administration has been making noise about increasing tariffs on foreign goods especially from China and there’s real fear that European countries could be next. Because many European companies rely on exports to both the U.S. and China, investors are increasingly nervous about the potential fallout from these policies. And when investors are nervous, they often shift their money elsewhere like the U.S. market, which feels like a safer bet for now.

2.  The Euro Takes a Hit

While U.S. stocks are surging, the euro is taking a hit. It recently dropped to its lowest point in a year, hitting around $1.05 its sharpest decline since the energy crisis of 2022. The euro’s drop is directly tied to concerns about Europe’s economic outlook. Traders are betting that Europe will suffer the most from Trump’s tariffs, which could slow down growth and force the European Central Bank (ECB) to cut interest rates further.

Meanwhile, the U.S. economy appears to be doing better, with many analysts expecting the Federal Reserve to ease monetary policy more slowly than the ECB. This economic divergence has investors flocking to the U.S. dollar, which in turn puts pressure on the euro. Some experts even think the euro could fall to parity with the dollar by 2025—something we haven’t seen in nearly two decades. If that happens, European companies that rely on U.S. exports will face even higher costs, which could further complicate their prospects.

3.  Tariffs and Their Impact on European Manufacturers

When you think about European industries that are feeling the pressure from Trump’s policies, manufacturing is at the top of the list. Europe’s industrial powerhouses, like Germany, are already dealing with weak demand from China and the aftereffects of the energy crisis caused by Russia’s invasion of Ukraine. But tariffs are arguably the biggest threat on the horizon.

Trump’s threats of hefty tariffs on Chinese imports some estimates suggest up to 60% could put European manufacturers in a tough spot. Not only could they face higher export costs to the U.S., but there’s also the risk that cheaper Chinese imports could flood the European market. This double-whammy would make it even harder for European companies to compete.

European automakers like Volkswagen and Mercedes, as well as luxury brands like LVMH, are particularly exposed. These companies sell a lot of products in both the U.S. and China, so any new tariffs could hit them hard. The renewable energy sector is also feeling the heat, with companies like Ørsted and Vestas potentially losing out on U.S. market share as Trump’s administration doubles down on fossil fuels instead of renewable energy.

4.  U.S. Growth vs. Europe’s Struggles

In stark contrast to Europe’s challenges, U.S. companies are benefiting from a more favorable economic environment. Tax cuts, deregulation, and a strong domestic economy are helping U.S. companies grow, while European firms are struggling with stagnant demand and rising costs. This difference in economic momentum is reflected in investor sentiment. A recent Bank of America survey showed that fund managers are more bullish on U.S. stocks than they’ve been in over a decade, while European stocks are largely underweighted in many global portfolios.

This divergence is clearly visible in the market performance. U.S. stocks have hit new highs, while European markets are stuck in neutral. With investors feeling more confident in the U.S., the gap between the two regions has only widened.

5.  Brexit and the U.K. in the Mix

And it’s not just the euro that’s feeling the pressure. The U.K. is also caught up in this trade war rhetoric. The impact of Brexit is still being felt, and now, the prospect of higher tariffs and the broader trade war are causing even more concern. Goldman Sachs has revised the U.K.’s growth forecast for 2025, downgrading it from 1.6% to 1.4% due to these risks.

The British pound has also taken a hit, falling over 2% against the dollar recently. Add to this the rising taxes from the U.K. government’s latest budget, and it’s clear that British businesses are facing tough times. The combination of Brexit and the trade war leaves the U.K. struggling to find its footing in an already uncertain global environment.
So What’s Next for Europe?

So, what can we expect going forward? Europe faces a difficult road ahead. With no coordinated fiscal stimulus across the Eurozone, it’s unclear where the support will come from to cushion the blow of Trump’s trade policies. Many analysts expect the ECB to cut interest rates further, but monetary policy alone might not be enough to offset the impact of rising tariffs and slower growth.

For investors, the message is clear: the gap between U.S. and European stocks is widening, and it’s likely to continue for the foreseeable future. It will take more than just a shift in policy to close this gap—unless Europe can stabilize its economy and find new ways to navigate the challenges posed by trade wars and a weakening euro.

Conclusion:

In the grand scheme of things, the growing divide between U.S. and European stock performance is driven by Trump’s trade policies, which are creating significant uncertainty in Europe. While the U.S. market benefits from strong growth and investor confidence, European markets are struggling to keep pace, weighed down by fears of tariffs and the broader economic fallout. For now, the gap looks likely to continue, and for investors, the lesson is clear: the U.S. is emerging as the more favorable market in this global economic environment.