European Markets Rally as Valuations, ECB Policy, and Strong Earnings Drive Gains

European financial markets posted strong gains this week, with the Euro Stoxx 50 (+3.15%), CAC 40 (+2.58%), and DAX (+3.33%) benefiting from better-than-expected corporate earnings, attractive valuations compared with their U.S. peers, as well as accommodative monetary policy. This upward trend extends beyond weekly movements, as European indices have continued to outperform since 2025.

The ECB’s Supportive Policy Fuels Market Optimism

A key catalyst for the rally has been the European Central Bank’s (ECB) series of rate cuts. Since June 2024, the ECB has gradually lowered its deposit facility rate from 4% to 2.75%, with the latest adjustment taking effect on February 5, 2025. This policy shift reflects growing confidence that inflation will return to the 2% target in 2025, as reaffirmed by ECB President Christine Lagarde in early January.

Lower interest rates reduce borrowing costs for businesses and households, stimulating economic activity and reinforcing equity market gains. As a result, European stocks, particularly in interest rate-sensitive sectors, have benefited from improved financial conditions and investor optimism.

European Equities Remain Undervalued Compared to the U.S.

Another factor attracting investors to European markets is their lower valuation compared to their U.S. counterparts. Although the figures vary depending on the indices used, there is a consensus that the relative gap between the P/E ratios of U.S. and European large-cap stocks was at least 40% as of the end of December 2024 (see, for example, Siblis Research, P/E Ratios by Country).

This valuation gap marks one of the widest disparities in recent history. As a result, global investors are increasingly turning to European equities, seeking better risk-adjusted returns. This shift has contributed to the region’s sustained outperformance since the beginning of the year.

Strong Earnings from Internationally Exposed Companies

Corporate earnings have also played a role in the market’s rally, particularly for European companies with significant exposure to international markets. Hermès International, a leader in the luxury sector, reported a 15% increase in 2024 revenues to €15.2 billion, driven by continued demand in the U.S. and Asia. The company’s stock has surged following its earnings report, reinforcing positive momentum within the broader luxury segment.

In addition to Hermès International, other multinational European firms, such as Safran, Bayer, and Siemens, have also contributed to market optimism. Their ability to generate substantial revenue outside of Europe provides resilience against regional economic uncertainties, further boosting investor confidence.

ETF Market Performance Overview

European equity markets posted strong gains over the week, continuing their impressive year-to-date rally. The Eurozone ETF segment advanced by 3.12% WTD, bringing its YTD performance to +12.38%. This momentum has been accompanied by substantial inflows, with €1.51 billion added since the start of the year, highlighting strong investor confidence in the region. Germany led the charge, with ETFs gaining 3.22% WTD and 12.43% YTD. French ETFs also performed well, rising 2.53% WTD, though they remain slightly behind other Eurozone markets in terms of YTD growth (+10.64%) against a backdrop of political instability.

Among individual funds, the iShares Core EURO STOXX 50 UCITS ETF (EXW1) climbed 3.26% WTD, reflecting the broader rally in Eurozone blue-chip stocks. Meanwhile, the iShares Core DAX UCITS ETF (DAXEX) outperformed, gaining 3.29% WTD and 13.01% YTD, with positive inflows of €299K this week, indicating sustained investor confidence in German equities.

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Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.