European Equities in the Shadow of U.S. Growth: A New Era of Spillover Opportunities

The U.S. economy's projected rebound in Q3 2025—driven by resilient consumer spending and a slowdown in import declines—has reignited global investor scrutiny over spillover effects on risk assetsWhy European stocks are outperforming the US - Goldman Sachs^[1]. While U.S. growth forecasts stand at 2.2% for 2025US vs. Europe: Unlocking Equity Growth Prospects^[4], European equities have defied expectations, outperforming their American counterparts by a striking margin. The MSCI Europe Index has surged 17.3% year-to-date in 2025, compared to a -3.5% return for the MSCI USA IndexEuropean Stocks Surge Ahead Of S&P 500 In Q1 2025^[3]. This divergence raises critical questions: How is U.S. growth indirectly fueling European equity optimism? And what structural shifts are reshaping the risk-rebalance between transatlantic markets?

The U.S. Growth Spillover: A Double-Edged Sword

The U.S. economy's trajectory has long acted as a gravitational anchor for global capital. However, 2025 has seen a nuanced shift. While U.S. monetary policy remains tight, the Federal Reserve's cautious approach to rate cuts contrasts with the European Central Bank's aggressive easing cycleWhat’s next after US equities: The European opportunity^[5]. This divergence has amplified the appeal of European equities, which trade at a 30% forward P/E discount to U.S. stocksWhat’s next after US equities: The European opportunity^[5]. According to a report by Goldman Sachs, the ECB's rate cuts—coupled with Germany's EUR 1 trillion fiscal stimulus—have created a “policy tailwind” for European companies, particularly in defense, industrials, and financialsWhy European stocks are outperforming the US - Goldman Sachs^[1].

Meanwhile, U.S. trade policies, including proposed tariffs on European goods, have introduced asymmetry. European firms, which derive only 24.5% of revenues from the U.S. compared to 40% for U.S. companiesEuropean Stocks Surge Ahead Of S&P 500 In Q1 2025^[3], have shown greater resilience to trade disruptions. This dynamic has allowed European equities to capitalize on undervaluation while U.S. markets grapple with policy uncertainty.

Structural Shifts: Valuation Gaps and Fiscal Catalysts

The valuation gap between U.S. and European equities has become a focal point for investors. As of September 2025, the MSCI Europe Index trades at 14.6x forward earnings, versus 20.8x for the S&P 500European Stocks Surge Ahead Of S&P 500 In Q1 2025^[3]. This discount, combined with higher dividend yields (averaging 3.8% in Europe versus 0.9% in the U.S.), has attracted capital seeking income and valueWhat’s next after US equities: The European opportunity^[5]. UBS analysts note that Europe's historically low capacity utilization—historically a drag on growth—may now be a tailwind, as fiscal stimuli boost demand for underutilized industrial and infrastructure assetsHOLT: US Exceptionalism & the case for a further …^[2].

Germany's fiscal pivot is a case study in this transformation. The country's EUR 500 billion infrastructure fund and temporary suspension of the debt brake for defense spending have signaled a departure from austerityEuropean Stocks Surge Ahead Of S&P 500 In Q1 2025^[3]. These measures, paired with cross-border investments in green technology and rearmament, have spurred optimism. For instance, defense stocks like Rheinmetall and Thyssenkrupp have surged on long-term rearmament contractsEuropean Stocks Surge Ahead Of S&P 500 In Q1 2025^[3], while banks and industrials benefit from anticipated economic accelerationWhat’s next after US equities: The European opportunity^[5].

Risks and Asymmetries: The U.S. Shadow

Despite the optimism, risks loom. U.S. growth projections—2.2% for 2025—remain significantly higher than Europe's 1.0%US vs. Europe: Unlocking Equity Growth Prospects^[4], which could pressure European firms with U.S. exposure. Moreover, the spillover effects of U.S. monetary policy persist: a third of the variance in European bond yields is tied to U.S. 10-year Treasury movementsWhy European stocks are outperforming the US - Goldman Sachs^[1]. This synchronization means that any Fed tightening could reignite volatility in European markets, even as fiscal stimuli provide a buffer.

Goldman Sachs cautions that much of Europe's equity rally has already priced in future growth, leaving limited room for errorWhy European stocks are outperforming the US - Goldman Sachs^[1]. Structural challenges—such as fragmented capital markets and regulatory hurdles—remain unresolvedEuropean Stocks Surge Ahead Of S&P 500 In Q1 2025^[3]. Additionally, investor flows, while currently favoring Europe (€14.6 billion added to European equity ETFs in Q1 2025US vs. Europe: Unlocking Equity Growth Prospects^[4]), could reverse if U.S. growth accelerates or trade tensions ease.

The Road Ahead: A Balanced Outlook

The interplay between U.S. growth and European equities underscores a broader theme: global markets are increasingly shaped by policy asymmetries. While European stocks offer compelling value and fiscal catalysts, their long-term success hinges on structural reforms and sustained capital inflows. For investors, the key lies in balancing exposure to Europe's valuation-driven opportunities with hedging against U.S. policy risks.

As the Bank of America Fund Manager Survey notes, 60% of investors now expect stronger European growth—a stark shift from 2024What’s next after US equities: The European opportunity^[5]. Whether this optimism translates into sustained outperformance will depend on how well Europe navigates the dual forces of fiscal expansion and U.S.-led global dynamics.