Is the tide turning in Europe? Overseas investors will probably need to see more good news before turning positive on European equities. But preliminary PMIs released last week in the euro area point to improving business conditions in early 2025, amid a growth environment that remains nonetheless quite sluggish. Coupled with better-than-expected developments in trade tensions between the US and China in the early days of the Trump mandate, this has contributed to propelling European equities. It has particularly supported sectors that are quite sensitive to China, such as consumer durables and apparel. In the past three weeks, i.e. since the beginning of 2025, the STOXX Europe 600 has almost delivered the same performance as for the whole of 2024 (+4.4% YTD versus +6% in 2024 in price return terms).

Widely expected ECB rate cuts will also contribute to supporting economic activity. On 30 January, we expect the ECB to cut rates by 25bps, while the Fed will likely stay put at the 29 January FOMC meeting, in our view. This divergence is priced in in our view, and we discuss upside risks on the EURUSD at the end of the report.

We are making three changes to our European Stoxx sector allocation. One common transversal theme is that the EU might gradually adopt a competitiveness/growth agenda, which would require changes to some regulatory frameworks, notably green regulations. This would definitely help some sectors (such as Autos, Steel, Real Estate) at the expense of some others, in particular Utilities, as policymakers will try to lower energy costs. Trump’s aggressive corporate-friendly policies (deregulation and fiscal haven) should force the EU to react faster.

  • Autos (from UW to N) it is now more apparent (see recent comments from Manfred Weber, chief of the EPP block in the EU parliament) that the EU will likely introduce more flexibility into its targets and lessen the financial pressure on EU car makers to comply (fines). More pragmatic rules could revive demand in Europe, where the car fleet has become much older (12 years). We also stress that the sector is well correlated with manufacturing PMIs. Why not OW? We are still missing details on the EU’s plans and uncertainties over Trump’s trade war remain (tariffs on Mexico, tariffs on European imports). Last, sector fundamentals will remain complicated, with Chinese players eroding global market shares and creating over-supply.
  • Luxury (from N to OW) against the backdrop of better Q4 earnings, signalling the end of the negative earnings momentum that weighed on the sector last year, we think the more cyclical stocks (i.e. c. 70% of the luxury index ex Hermès) could benefit from a gradual recovery in consumer sentiment globally. This phenomenon should kick off with the US, the biggest luxury market (and in fact this was visible as of December 2024). Crucially, the risks related to the trade war had prevented us from turning more positive. Trump’s statement that he might avoid imposing tariffs on China is leaving room for more optimism. Indeed, a European-Chinese trade war is less likely if the US doesn’t close its markets to China.
  • Utilities (from OW to N) at this stage, low visibility prevails pending the EU’s reforms to boost competitiveness (lower energy costs?). Also, fixed income markets remain on cautious mode due to inflation uncertainty in the US. Higher bond yields would hurt the sector. Why not UW? The relative valuation is already very depressed, reflecting some of our concerns. Hence our Neutral.

Separately, our detailed sector focus of the week is on Healthcare, on which we reiterate our OW ahead of the Robert F. Kennedy Jr. nomination hearing on Wednesday 29. The sector didn’t welcome Trump’s choice: Kennedy is a vaccine sceptic and would like to disrupt the sector’s prices. However, there is a chance he will not be confirmed in the closely divided Senate, as he can only afford to lose three Republican votes if every Democrat opposes him. Even if RFK Jr. is confirmed, he will likely have to suppress some of his ambition. Many administrations have attempted to lower US drug prices or at least bring them closer to drug prices in Europe, but it has never actually happened. In fact, statistics suggest pharma stocks typically perform much better once the election year is over. Last, valuation looks very low (c. 13x) compared to current earnings growth expectations (estimated at +12% in 2025).

Week ahead: the Fed / ECB monetary policy meetings are unlikely to bring significant surprises. Meanwhile, US and euro area Q4 GDP figures are unlikely to move markets significantly, though any better-than-expected figures in the euro area could reinforce the positive sentiment we discuss above. With regards to the earnings season, Amazon, Meta, Apple, Tesla, Microsoft, Intel, IBM, General Motors, and Boeing are due to report, along with defence companies such as Lockheed Martin, RTX, L3Harris Technologies, General Dynamics, and Northrop Grumman. In Europe, LVMH, Christian Dior, ASML, STMicroelectronics, SAP, Roche, Novartis, Sanofi, Ryanair, Givaudan, Volvo, ABB, Shell, BBVA, CaixaBank, and Deutsche Bank are among the companies set to report quarterly earnings.