Unlocking European Equity Value: Leveraging U.S. Momentum in a Cross-Atlantic Shift

The global equity landscape has witnessed a dramatic realignment in 2025, with European stocks outperforming their U.S. counterparts for the first time in over a decade. This shift, driven by a confluence of monetary, fiscal, and geopolitical factors, has created a unique opportunity for investors to leverage U.S. equity momentum strategies to identify undervalued European equities. As the valuation gap between the two markets narrows, the strategic alignment of sectors and the structural inefficiencies in European markets present compelling avenues for alpha generation.

The Drivers of European Outperformance

European equities have surged in 2025, . dollar terms, . This outperformance is underpinned by three key factors:
1. Monetary Policy Divergence: According to JPMorgan, the European Central Bank's (ECB) accommodative stance, including targeted long-term refinancing operations, has injected liquidity into European markets, contrasting with the Federal Reserve's tighter monetary policy.
2. Fiscal Stimulus: , defense, and renewable energy sectors.
3. Geopolitical Realignment: According to Goldman Sachs, increased NATO defense spending, particularly in Eastern Europe, has driven a 67% surge in European defense stocks since January 2025.

These factors have not only boosted earnings but also narrowed the valuation gap between European and U.S. equities. The MSCI World ex US index, , , reflecting improved investor sentiment.

U.S. Momentum Strategies in European Context

U.S. equity momentum strategies, traditionally focused on price trends and relative strength, have found fertile ground in European markets. The application of these strategies is supported by empirical evidence: a 2023 study on time series momentum . This suggests that momentum-driven approaches can generate abnormal returns in European markets, particularly when combined with value and profitability metrics.

Sectoral Opportunities:
- Defense and Industrial Automation, compared to U.S. .
- Banking and Financials: European banks such as UniCredit and CaixaBank, trading below book value, are capital-returning plays in a low-interest-rate environment.
- Renewables and Utilities: EDP and Verbund provide long-duration yield with regulatory tailwinds, leveraging EU green subsidies.

Case Studies: U.S. Funds and Performance Metrics

Several U.S. funds have successfully applied momentum strategies to European equities. For instance, the Janus Henderson Global Equity Fund increased its European exposure by 30% in 2025, focusing on defense and industrial sectors. , . Similarly, the WisdomTree European Equity Fund adopted a momentum-driven mean-variance optimization (MVO) strategy, achieving a 1.5x Sharpe ratio over 12 months by overweighting undervalued European financials and industrials according to ResearchGate.

Academic validation further supports these strategies. A 2025 study found that combining value, profitability, , outperforming traditional benchmarks. This aligns with the observed trend of European equity funds delivering stronger 3- and 5-year returns compared to U.S. counterparts.

Challenges and Considerations

While the momentum is strong, investors must remain cautious. According to AMG, European markets remain fragmented, with regulatory disparities across 50+ countries complicating execution. Additionally, the risk of a U.S. equity correction looms, as stretched valuations and slowing earnings growth could reignite cross-Atlantic contagion. However, the structural advantages-lower valuations, sectoral parallels, and macroeconomic tailwinds-suggest that European equities are well-positioned to sustain their outperformance.

Conclusion

The cross-Atlantic shift in momentum presents a rare opportunity for investors to harness U.S. equity strategies in European markets. By leveraging valuation disparities, sectoral synergies, and academic insights, U.S. investors can access high-growth European equities at a discount. As the ECB's policy support and fiscal reforms continue to reshape the European landscape, the integration of momentum-driven frameworks offers a robust pathway to outperforming traditional benchmarks.