European stocks are rallying while the U.S. market struggles to hold its ground. HSBC strategists have made a significant shift, upgrading European equities while downgrading the U.S. market. Investors watching these moves may see new opportunities emerge, especially as Europe gains momentum from economic policy shifts and increased military spending.
HSBC has upgraded European stocks (excluding the U.K.) to overweight from underweight while downgrading the U.S. to neutral. However, even with this shift, their recommended allocation remains heavily weighted towards the U.S., at 64%, with just 11% going to Europe. This adjustment follows a strong run for European stocks, with the Vanguard FTSE Europe ETF gaining 16%, while the S&P 500 has fallen by 2%.
Earlier this year, HSBC backed emerging markets, a call that has performed well, with the iShares MSCI Emerging Markets ETF rising by 6%. However, Europe has outperformed, largely due to policy shifts and geopolitical developments. HSBC strategists, led by Alastair Pinder, noted that the U.S.’s wavering stance on NATO and Ukraine has driven a major shift in the eurozone, with Germany expected to roll out substantial fiscal stimulus.
The German government’s plan to work around its debt brake through constitutional changes is expected to succeed. If it does, this could set a precedent for other European countries to increase spending, sustaining the rally in European equities. Meanwhile, military spending has strengthened the euro, with its movements historically leading earnings revisions by about three months.
Despite downgrading the U.S., HSBC sees potential in tech stocks. The “Magnificent Seven” now trades at 26.7 times forward earnings, down from 31.1 at the start of the year. Earnings-per-share revisions for these stocks have risen by 6% since July, while the rest of the S&P 500 has seen a 5% downgrade.
A crucial test for global markets is approaching in April when nearly two dozen trade reviews and investigations ordered by former President Donald Trump are due. While tariff threats and defense concerns create headline risks, they could also drive long-term stock market gains. China has already ramped up fiscal support, Germany is leading Europe’s fiscal response, and further U.S. tax cuts could be on the horizon.
If global trade tensions ease, a sharp equity rally could follow. Investors will be watching closely to see if Europe’s momentum holds and if the U.S. market regains its footing in the months ahead.
JPMorgan European Discovery Trust plc is an investment trust company. The Investment Trust JEDT objective is to achieve capital growth from a portfolio of quoted smaller companies in Europe, excluding the United Kingdom.
