Why US-shy investors are packing their bags for Europe

In the first quarter of 2025, European equities generated their best performance versus US shares in 30 years³, driven by supportive economic policy and better than expected domestic data.

Since then, global investor sentiment on Europe has continued positive, particularly on the back of more muted outlooks for other regions as they face challenges on US trade policy. According to a June 2025 survey of more than 200 BlackRock European clients, 68% have a more positive view of their home region than they had at the beginning of 2025 (see chart below).⁴

BlackRock European client survey results, June 2025

Source: BlackRock. Survey data based on 201 survey submissions as of the 1st June 2025. Represents change in sentiment towards European equities since start of the year.

In Australia this trend has also shown through in a dramatic turnaround in inflows to the iShares Europe ETF (IEU) so far this year. IEU has picked up more than $52 million year to date in net flows⁵, placing the fund in our top 20 most popular ETFs of 2025.⁶

Compared to around $37 million in outflows for the fund in 2024⁷, this highlights the degree to which investors are taking notice of the economic recovery in Europe. Globally, too, 15% of all iShares ETF flows year to date have gone to European equity products – the highest percentage share of any region⁸.

A large part of investor optimism around Europe has been driven by large-scale spending plans initiated by both the German and broader European government (see chart below).

Defence spending as a share of GDP, historic and projected, 1960-2027

Source: BlackRock Investment Institute, NATO, World Bank, European Commission, 25 June 2025. Note: The solid lines show the defence spending as a share of GDP for Germany and European NATO countries. The dotted lines assume current plans to boost defence spending are realised.

The European Commission’s ambitious ReArm Europe plan includes around 800 billion euros in government spending to boost defence capabilities.⁹ The EU goal as part of ReArm is to raise local defence procurement from the current 20-35% to 50% by 2030 to reduce reliance on the US, making European industrials a particularly ripe area for potential growth.

Meanwhile Germany has outlined a long-term defence spending increase of as much as 3-3.5% of German GDP, as part of an overall 1 trillion euro investment into its domestic economy over the next decade.¹⁰

Secondly, a gradual consumer recovery appears to be underway in Europe, with corporate and consumer loans both growing strongly, leading to more profit upside for European banks despite interest rates starting to come down. The most recent PMI data also indicates that new manufacturing orders in the Eurozone have stabilised after nearly three years of declines, with manufacturing output rising consistently over March, April and May 2025.¹¹

Even though European equity valuations have increased significantly in the first half of 2025, they still remain historically low compared to the US. This trend has developed over the past decade as investors preferred US tech innovations and viewed Europe as an 'old world' economy. However, these lower valuations may gradually rise as Europe undergoes structural changes.

The valuation gap between Europe and the US remains wide

Source: Bloomberg, BlackRock, as of 22 May 2025

Looking at how industry weightings in the MSCI Europe Index have changed over time, for instance, we see that energy, banks and telecommunications have seen the largest declines from 2014-2024, while life sciences, semiconductors and capital goods have increased the most.¹² European companies have also become more global, with constituents of the Stoxx 600 Index now deriving around 60% of revenues from outside the EU, compared to around 40% in 2005.¹³

While the imposition of tariffs by the US may act as a drag on Europe’s positive long-term trajectory, investors should consider the context. Around 26% of MSCI Europe constituent revenue comes from the US, but just 6.5% comes from US exports that will be directly subject to trade barriers. It’s important to note that European corporates may be affected by any US economic downturn as a result of trade policy, but there’s perhaps less direct impact from the tariffs themselves.

In the current global market environment, macro uncertainty in trade policy and geopolitical tensions are creating more performance dispersion across sectors, geographies and asset classes. ETFs can be a useful tool allowing investors to strategically adjust their portfolio and tap into opportunities in specific markets as they arise, which has been a popular approach so far this year.

Strategic ETFs – those allowing investors to dial into a particular single market or sector – have taken in more than US$95 billion from iShares investors, the most popular ETF category globally for 2025 to date. European equities is one such single market exposure investors can dial into through the iShares Europe ETF (IEU).

Investors can use IEU to either add to their existing global equity investments as a long-term portfolio ‘building block’, or trade tactically to take advantage of the current strong growth in European markets. With financials, industrials and healthcare among IEU’s largest sector weightings, investors can tap into the recovery of the European consumer, reinvigorated defence spending in the EU, and longer-term ‘mega forces’ such as demographic change and global rewiring of supply chains.

Given ongoing volatility in the US, adding an allocation to European equities may also make sense as a portfolio diversifier for those with existing US or broad global equity exposure, as the US makes up approximately 70% of stocks in major global equity indices like the MSCI World and S&P Global 1200 Index.¹⁴ As seen in the chart below, we’ve seen 2024’s market trends essentially reverse in 2025 as US equities in particular give back gains versus other equity markets. In this context, a Europe-specific exposure may allow investors to tap into the region’s growth opportunities that are being driven by domestic forces, and are relatively isolated from tariff-related uncertainty.

Equity performance, 2024 vs 2025, year to date¹⁵

Source: BlackRock Investment Institute, MSCI, with data from Bloomberg, 30 April 2025. The “magnificent 7” index includes Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. Index proxies: Bloomberg US Large Cap ex. Magnificent 7 for U.S. large caps, MSCI USA for U.S., MSCI Europe for Europe, MSCI World ex. USA for Rest of the World, MSCI Emerging Markets excluding China for Emerging markets ex. China, MSCI China for China.

Overall, as the search for returns in turbulent equity markets gets increasingly specific, European equities may represent a compelling option in the months ahead.