Morgan Asset Management Predicts 2025 European Stocks Outperformance

Morgan Asset Management has taken a bullish stance on European stocks, countering three major concerns that have been raised by investors. The firm believes that 2025 will be a strong year for European equities, potentially outperforming their U.S. counterparts. This optimistic outlook comes despite recent pessimism from other major financial institutions, which have expressed doubts about the upward trajectory of European stocks.

One of the primary concerns addressed by Morgan Asset Management is the perceived lack of intrinsic profitability among European companies. Critics often point to structural issues such as fragmented capital markets and rigid labor laws as significant barriers to growth. However, historical data shows that these issues have not prevented European companies from achieving substantial profits. For instance, during the period from the bursting of the dot-com bubble to the onset of the financial crisis, the MSCI EMU index outperformed the S&P 500 in terms of earnings growth. This period saw an annualized earnings growth rate of 29% for MSCI EMU companies, compared to 13% for S&P 500 companies.

Another common concern is the lack of tech giants in Europe that are driving innovation in artificial intelligence. While it is true that Europe lags behind the U.S. in technological innovation, European companies are poised to benefit from the widespread adoption of AI technologies. The deployment of these technologies will enhance productivity and drive earnings growth, not just for U.S. tech giants but for European companies as well.

The third concern revolves around the potential negative impact of a stronger euro on European corporate earnings. A stronger euro can indeed erode the profits of European exporters, but the firm argues that the European economic recovery is likely to be driven by domestic factors, particularly household consumption. As interest rates fall, high savings rates are expected to decline, boosting consumption. Additionally, European financial institutions, which are well-capitalized, will play a crucial role in driving earnings growth as they deploy capital in a more normalized interest rate environment.

Historical data also refutes the notion that a stronger euro necessarily hinders European stock market performance. In fact, periods of euro appreciation have often coincided with strong performance in European equities. For example, during the early 2000s until the financial crisis, the MSCI EMU index outperformed the S&P 500 by an annualized 5.2 percentage points in local currency terms, while the euro appreciated by approximately 40% against the U.S. dollar. For investors denominated in euros, the annualized outperformance of the MSCI EMU was an impressive 9.8 percentage points.

Despite growing recognition that European stocks may be at a turning point, many investors worry that they have missed the optimal entry point. However, the firm believes that this concern is unwarranted. From a valuation perspective, European stocks have not yet fully reflected the sustainable and broad-based earnings growth expected over the next few years. Analysts project that MSCI EMU companies will achieve a modest 8% earnings growth over the next year, with investors paying a price-to-earnings ratio of 14 times. In contrast, the S&P 500 is expected to grow earnings by 12% over the next 12 months, but at a price-to-earnings ratio of 22 times.

Moreover, each sector within the MSCI EMU index continues to trade at a discount relative to its U.S. counterparts, even after recent gains. The firm views this significant potential for investor revaluation as a strong argument for European stocks to outperform. Despite the "lost decade" for European equities, the firm maintains that the current valuation provides a compelling entry point for investors.