Rising Momentum in European Equities: A Strategic Buy Signal?

The European equity market is at a crossroads. After years of tepid growth and outflows, recent data suggests a reversal of fortune. Investors are increasingly allocating capital to European equities, driven by a combination of macroeconomic resilience and shifting global dynamics. But does this momentum signal a strategic buy opportunity, or is it a fleeting reaction to temporary conditions?

Macroeconomic Resilience: A Foundation for Growth

The European Union’s economic outlook, while modest, remains stable. The Spring 2025 Economic Forecast projects real GDP growth of 1.1% for the EU and 0.9% for the euro area, a slight moderation from 2024 but consistent with a broader trend of adaptation to global headwinds [1]. This resilience is underpinned by a composite Purchasing Managers’ Index (PMI) above 50 in early 2025, indicating ongoing expansion in services and manufacturing sectors [3].

However, challenges persist. The eurozone’s Q2 2025 GDP growth slowed to 0.1%, reflecting growing caution among businesses and households amid U.S. tariff threats and geopolitical uncertainties [2]. Yet, the European real estate market offers a counterpoint: investment volumes are expected to rise by 13% year-over-year in 2025, signaling cautious optimism among institutional investors [3]. This divergence highlights the complexity of the region’s economic landscape—where structural reforms and fiscal stimulus coexist with external vulnerabilities.

Market Sentiment: A Shift in Investor Behavior

Investor sentiment has turned decisively in favor of European equities. The first half of 2025 marked a historic inflection point: European equity funds attracted EUR 26 billion in Q1 and an additional EUR 22 billion in Q2, ending 12 consecutive quarters of net outflows [1]. By June 2025, net inflows had reached EUR 19.1 billion, with large-cap strategies gaining 4% organic growth [1]. This surge contrasts sharply with the mere EUR 274 million in inflows into U.S.-domiciled equity funds during the same period [1].

Such momentum is not purely speculative. It reflects a recalibration of risk-return profiles. European equities now trade at a discount to global benchmarks, supported by improving corporate earnings and a more favorable regulatory environment. For instance, the STOXX Europe 600 Index, despite a 1.99% decline in a recent week due to trade uncertainties, has benefited from long-term inflows driven by fiscal spending plans and increased defense and infrastructure investments [3].

Strategic Buy Signal? Balancing Risks and Rewards

The case for a strategic buy signal hinges on two critical factors: durability of macroeconomic conditions and alignment with global capital flows.

1. Macroeconomic Durability: While the EU’s 1.1% growth projection is modest, it is achievable given the region’s fiscal flexibility. The European Central Bank’s (ECB) July 2025 policy meeting revealed a nuanced debate among policymakers—some advocating for caution due to inflation risks, others emphasizing growth concerns [3]. This split suggests a potential pivot toward accommodative policies if inflationary pressures ease, which could further support equity valuations.

2. Global Capital Flows: The shift in investor sentiment is part of a broader trend. Global ex-U.S. equity funds saw a record $13.6 billion inflow in July 2025, the highest since December 2021 [3]. European equities, in particular, are benefiting from their relative undervaluation and exposure to sectors like renewable energy and advanced manufacturing—areas poised for long-term growth.

Yet risks remain. U.S. trade policy shifts, such as proposed tariffs on EU imports, could disrupt this momentum. Additionally, the Economic Sentiment Indicator (ESI) dipped slightly in August 2025, signaling lingering caution among businesses and consumers [4]. These factors underscore the need for a measured approach.

Conclusion: A Calculated Opportunity

The rising momentum in European equities reflects a confluence of macroeconomic stability, strategic fiscal policies, and a reallocation of global capital. While the region’s growth trajectory is not without risks, the current valuation discount and improving fundamentals present a compelling case for a strategic buy signal—particularly for investors with a medium-term horizon.

As always, the key lies in balancing optimism with prudence. European equities may not offer the explosive growth of their U.S. counterparts, but they present a resilient, diversified opportunity in an increasingly fragmented global market.

Source:
[1] Spring 2025 Economic Forecast: Moderate growth amid global economic uncertainty [https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts/spring-2025-economic-forecast-moderate-growth-amid-global-economic-uncertainty_en]
[2] Euro Area GDP Growth Rate [https://tradingeconomics.com/euro-area/gdp-growth]
[3] Global markets weekly update [https://www.troweprice.com/personal-investing/resources/insights/global-markets-weekly-update.html]
[4] Latest business and consumer surveys - European Commission [https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/business-and-consumer-surveys/latest-business-and-consumer-surveys_en]