“The European Deal”: Flows are strengthening, the risk/reward ratio is optimal”

A single phone call doesn’t make a Hollywood romantic comedy, but today’s market seems to be in love.

While few believe true love is blossoming between Trump and von der Leyen, investors clearly continue to bet on a bullish scenario for Europe. European stocks are staging a comeback, supported by accelerating cash flows. Cynics may smirk — but for now, love for Europe is in the air.

Mean Reversion: The Revenge of Europe

So far this year, we’re seeing a strong return to the mean:

• Eurozone stocks are up 24%,
• Global markets overall are up 14%,
• While the S&P 500 is down 1%.

Support for Europe

A shift in the balance of uncertainty could further support European valuations compared to those in the U.S.

The Strength of Inflows Is Real

Monetary inflows from global investors into European equity funds over the past month.

Light Positioning

Positioning in Europe remains light — investors are still not fully committed.

Room to Grow

Inflows in 2025 still haven’t reached 2021 levels. The chart shows calendar-distributed flows from global investors into European equities.

Last Night in Sweden

Capital flow from Swedish retail investors shows rotation from U.S. equities to local Swedish ones. This is notable, as Sweden is known for its “stock culture” and often leads new trends.

Defensive Sectors in the EU

Despite resilient economic data and rising yields, defensive sectors are rebounding against cyclical ones — a bullish signal.

From the Ashes

Germany’s recovery continues into the second quarter.

Trade with the EU

The U.S. is importing a record $656.6 billion in goods from the EU over the past 12 months. Part of this is driven by American importers trying to preempt potential Trump tariffs. The EU now accounts for 18.7% of U.S. goods imports.

The Eurozone Doesn’t Look So Bad This Time

Barclays summarizes:

1. “Relatively speaking, the eurozone appears in better shape and is no longer the epicenter of sovereign debt market issues. This is mostly due to Germany – the region’s largest economy, with sufficient fiscal capacity to support a slowing economy.”
2. “Our economists see more room for the ECB to cut rates compared to the Fed, Bank of England, and Bank of Japan, which could further suppress German bond yields and spreads in the periphery.”
3. “While down, the equity risk premium (ERP) in the eurozone remains positive – unlike in the U.S. and U.K., where stocks seem overvalued relative to bonds and more sensitive to rate hikes. So despite fiscal concerns, we don’t think they’ll be a major obstacle for European equities.”

The Statistics

Debt-to-GDP ratio, fiscal balance, and economic growth across major developed economies.

Advantage in EU’s Risk Premium

The equity risk premium is falling across all major regions but remains higher in the EU compared to the U.S. and U.K.