The debate about whether a period of US exceptionalism is coming to an end and whether European stocks can close the gap on Wall Street continues. We have seen some evidence of such a shift so far in 2025 but, given the scale and protracted nature of European stocks’ underperformance, there could be a long way to go. A potential trade war between the EU and US, the chances of which – as we discuss in this News section – have eased slightly, adds a wildcard element.

Bank of America (BofA) notes European equities’ price relative to US equities has declined by more than 60% since the mid-noughties. The investment bank acknowledging this is thanks to weaker earnings growth, resulting from weaker economic performance. It flags that Europe’s nominal GDP has fallen by more than 20% relative to that in the US since the early 2000s.

And yet as it says: ‘A number of policy shifts over recent months have improved Europe’s structural outlook: (a) more supportive German fiscal policy, which should start to boost German and, hence, Euro area, GDP growth from next year onwards; (b) the push towards joint European defence spending; (c) renewed momentum towards European integration, which could help to unlock productivity gains; and (d) an increasingly stretched fiscal balance in the US, which, our economists highlight, could put pressure on policymakers to engage in renewed fiscal consolidation.’

‘A good-case scenario could see German fiscal and broader European defence spending, the implementation of an ambitious European reform agenda and some fiscal consolidation in the US over the coming years, which could help to break the spell of Europe’s two-decade-long underperformance.’

However, BofA remains sceptical about the continent’s near-term growth and the immediate outlook for European shares – particularly after their relatively strong start to the year.

This is a view shared by Berenberg, analyst Jonathan Stubbs arguing: ‘The “easy money” has been made in the near term. Despite soft growth and net earnings downgrades, European equities have performed well year-to-date with returns of  around 10%. European shares have re-rated back above the long-term average 12-month forward PE (price to earnings ratio) of 14 times and are no longer cheap here.’

BofA concludes: ‘The catalysts for a potential end of European equities’ structural underperformance are coming into view, but it might take time and some luck for them to start showing up in the data.’

This trend of US leaving Europe in the shade has been reflected at a micro level in the recent fortunes of US obesity drug maker Eli Lilly (LLY:NYSE) versus its Danish counterpart Novo-Nordisk (NOVO-B:CPH). This week Martin Gamble compares the two and how they are placed as competition ramps up and the race to deliver a weight loss treatment in pill form accelerates.

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