European stock markets represent a significant portion of the global equity landscape, and shouldn’t be ignored by investors looking for a diversified investment portfolio. The main pan-European stock exchange, the Euronext is the third largest in the world, measured by the capital value of the companies trading on it. Major European companies include Nestle, AXA, LVMH, Siemens and SAP and the market spans a wide range of sectors, including energy, pharmaceuticals, banking, luxury goods and industrial automation.
The combined European equity market is mature and very diverse but has less emphasis on technology stocks than, for example, the US market, and a bigger weighting towards companies with a strong manufacturing and export base. That said, European companies are also leading the development of green technology, thanks to the European Union embracing the push towards renewable energy.
Over recent years, European economies struggled with the continued war in Ukraine leading to volatile energy prices, stubborn inflation, and relatively high interest rates. The result was that the performance of European equities has languished behind that of the US market.
However, during 2024 there were signs that the European equity market is starting to gain ground on those of other major economic areas.
Donald Trump and his erratic approach to foreign trade policy has caused anxiety in financial markets across the globe, and this has affected European equities along with those of every other region. However, if we take a long-term view when investing in equities and focus on the fundamentals of the economic back-drop, we are more likely to make good long-term investment decisions.
Let’s look at the key themes affecting the outlook for European equities:
The European Central Bank (ECB) has signalled potential rate cuts in 2025 as inflation across the eurozone trends back toward its 2% target. Lower rates typically boost equities by reducing borrowing costs for businesses and encouraging investment.
Trump’s threats to withdraw US military support has led to a realisation by the European Union that it needs to become more self-reliant in terms of defence. This has led to an easing of previously cautious state spending policies, particularly in France and Germany which have both committed to investing vast amounts into not only defence but also sustainable energy infrastructure. Other countries are following suit and this is likely to generate economic growth in those sectors, and others that support them.
Export demand, particularly for luxury goods, to major markets such as the US, China, and the emerging markets is increasing although demand from the US may be hindered if punitive tariffs are imposed.
Domestic demand for goods and services is also likely to continue strengthening as job security improves and interest rates decline.
A good measure of whether a company’s shares represent positive long-term value is the price of the shares compared to the company’s earnings, referred to as the “Price/Earnings ratio” or “P/E ratio”. European shares have for a long time traded at a significantly lower P/E ratio than similar US companies and, whilst this does not mean they will suddenly go up in value, it indicates that they offer potential growth opportunities in the medium to long term.
A major concern for markets worldwide is the US president’s threats to impose import tariffs on goods exported to the USA from almost every country in the world. The effects of these, should they become permanent, could be wide-ranging, not just for European companies but across all markets.
The initial and immediate effect would be to make imported goods more expensive for American individuals or businesses and potentially reduce demand. But it also would likely cause supply issues around the world as end products, such as automobiles, contain parts and materials supplied and manufactured in multiple countries, which could mean prices and therefore inflation start to go up in economies around the world.
In April 2025, when the threatened tariffs were due to take effect, equity and bond markets around the world reacted with extreme volatility but rebounded when the tariffs were put on hold. If they were to become permanent the long-term effect on economies, including those of Europe, remains uncertain.
With all the media frenzy surrounding Trump it is easy to lose sight of the threat posed by Russia, which in economic terms is mainly to do with oil and gas supply. Central Europe has been heavily reliant on Russia for these commodities. Although the European Union is taking positive action to ensure its energy supply is secure through investment in energy infrastructure and renewables, there will still be a need to import Russian gas and oil in the foreseeable future.
If you are investing for the long-term (5 to 10 years or more), equities can be a good place to invest as long as you can cope with short-term volatility and understand that potentially good returns also carry some risk of loss, especially in the short-term. And the stock markets of Europe include a diverse range of well-established and profitable companies, so should definitely be considered as part of a portfolio.
Access can be gained to European equity markets through actively managed mutual funds, such as unit trusts, that spread the investment over a wide range of companies, or Exchange Traded Funds (ETFs) that, typically, track the major stock market indices. Both methods reduce the potential risk of investing in individual shares.
The main European equity indices to watch are:
Investing in equities always carries a degree of risk, especially in the short-term, however a geographically diverse portfolio will reduce exposure to any single economy, and having European equities within a portfolio helps you achieve this. Before investing in equities you should gain a full understanding of what your own long-term aims are and make sure you are comfortable with the balance between potential risk and reward. Before making any investment decision it may be wise to seek the advice of a qualified professional.
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.
One of our qualified and regulated advisers would be very happy to discuss your requirements.
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