The new hot trade seems to be investing in Europe. The Euroztoxx 50 is up 11% YTD and the euro has strengthen almost 5% in the same period. For a U.S. based investor that means a mid teens return in dollars while the S&P500 is negative in the same period. While the Fed is likely on pause regarding rates and the Trump administration is cutting government spending, the ECB cut rates last Thursday and the EU is now increasing defense spending (see chart below) from 2% of GDP to 3.5%. That means GDP may increase 1.5% as a result and therefore provide a better framework for markets to shine. Add to that mix the fact that valuations are significantly cheaper in Europe than the U.S. and you have a winner. Is it sustainable? As long as the ECB keeps cutting rates in favor of growth despite seeing a spike on inflation, and France and Germany are truly committed to fiscal spending, the market can run. The tech sector is relatively small in Europe, but banks, industrials and defense contractors are big enough to lead the bull market. Is 2025 the year for Europe?
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