European Stocks: Why the Underperformance May Be Ending – J.P. Morgan’s 2025 Outlook

European equities started 2025 with a burst of optimism, but the rally quickly fizzled. By mid-year, the Stoxx 600 was trailing the S&P 500 by a wide margin, reigniting old debates about Europe’s structural disadvantages. Yet in November 2025, J.P. Morgan Global Research published a report suggesting that the tide may be about to turn. This article examines the forces behind Europe’s underperformance, the logic of a potential reversal, and what investors should watch in the coming months.

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The Story So Far: Europe’s Strong Start and Sudden Slump

The first quarter of 2025 saw European stock markets climb on hopes of a synchronized global recovery and easing energy pressures. The Stoxx 600 gained nearly 8% by February, led by financials and industrials. But from March onward, the gap with U.S. markets widened sharply. By October, the S&P 500 had returned roughly 18% year-to-date, while the Stoxx 600 had eked out just 5%.

[IMAGE: Chart comparing Stoxx 600 vs S&P 500 YTD performance with shaded zones marking the turning point]

Three factors explain the divergence. First, the U.S. tech surge—driven by artificial intelligence stocks and a handful of mega-cap names—pulled the S&P 500 higher in a way that Europe’s more cyclical, value-oriented market simply could not replicate. Second, the dollar strengthened against the euro and the British pound, making U.S. assets more attractive to global investors and depressing the dollar-denominated returns of European equities. Third, Europe’s domestic headwinds—persistent energy costs, a manufacturing slowdown in Germany, and cautious consumer spending—kept earnings growth modest.

The critical question for investors is whether this underperformance is cyclical or structural. If it is cyclical, a reversal is plausible as macro conditions shift. If structural, Europe may continue to lag for years.

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What J.P. Morgan’s November Report Reveals

On November 7, 2025, J.P. Morgan Global Research released a report that leans heavily toward the cyclical camp. Titled “European Equities: Underperformance Could Be Ending,” the analysis argues that the conditions are aligning for a change in leadership.

“European stocks are trading at a 35% discount to U.S. equities on a forward P/E basis, and at a 50% discount on price-to-book—levels that have historically preceded a rotation,” the report states. “With earnings resilience holding up better than feared and potential policy shifts on the horizon, the tide could turn in Europe’s favor.”

[IMAGE: Snapshot of a report cover or a data visualization showing valuation gaps between European and U.S. equities]

The report highlights three catalysts: valuation discounts that are too large to ignore, corporate earnings that are proving more resilient than consensus estimates, and the possibility of a more supportive policy environment from the European Central Bank and EU fiscal authorities. The quote anchors the narrative and adds credibility to the argument that the underperformance may indeed be ending.

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Deep Dive: The Hidden Economic Logic

To understand why J.P. Morgan believes the underperformance may be ending, we must examine the economic logic beneath the surface. Three layers matter: monetary policy divergence, sector composition, and structural factors.

Monetary Policy Divergence

The Federal Reserve began cutting interest rates in late 2024 and continued through 2025, while the European Central Bank moved more cautiously. This kept the euro relatively weak against the dollar for much of the year—a headwind for European stocks in dollar terms. However, the J.P. Morgan report notes that the ECB is now expected to accelerate its easing cycle in late 2025 and early 2026. A dovish pivot from the ECB would weaken the euro further, which is actually positive for eurozone exporters. More importantly, lower European rates could stimulate domestic demand and reduce the opportunity cost of holding European stocks versus bonds.

[IMAGE: Infographic showing key economic factors influencing European stocks (monetary, sector, structural)]

Sector Composition

Europe’s equity market is heavily weighted toward cyclical sectors: banks, industrials, energy, and basic materials. These sectors are sensitive to the economic cycle and were punished in 2024-2025 as fears of recession lingered. Meanwhile, the U.S. market’s overweight position in technology and growth stocks—especially AI-related names—benefited from a different structural story. The J.P. Morgan report argues that the composition itself is a source of potential catch-up: as the global economic outlook stabilizes, cyclical exposure becomes a tailwind rather than a headwind, especially if manufacturing PMI data improves.

Structural Factors

Beyond the cycle, Europe is undergoing structural changes that could provide long-term tailwinds. The EU’s NextGenerationEU recovery fund is still disbursing money for green transition projects. Defense spending is ramping up across the bloc, driven by geopolitical tensions with Russia and uncertainty about U.S. security guarantees. These are multi-year investment cycles that benefit European industrial and infrastructure companies. The report points out that these factors are often ignored in the short-term noise of U.S.-versus-Europe performance debates.

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Could a Rotation Be Underway? Evidence from Fund Flows and Valuations

If the J.P. Morgan thesis is correct, we should see early signs of a rotation in capital flows and valuation adjustments. The data offers some encouraging signals.

European stocks are undeniably cheap. The Stoxx 600 trades at roughly 13 times forward earnings, compared to the S&P 500’s 21 times. The price-to-book gap is even wider—around 1.6x for Europe versus 4.2x for the U.S. Such extreme discounts have historically been followed by mean reversion. The report emphasizes that while cheap alone is not a reason to buy, when combined with improving fundamentals, it becomes a powerful argument.

[IMAGE: Bar chart comparing P/E ratios of Stoxx 600 vs S&P 500, with an arrow indicating possible convergence]

Recent fund flow data from EPFR and Morningstar shows a subtle shift. In October and early November 2025, global equity funds saw net inflows to European value and dividend stock ETFs for the first time in several quarters. While the volumes are still small relative to U.S. flows, the direction is noteworthy. The rotation appears to be led by institutional investors seeking refuge from overvalued U.S. mega-caps.

Currency effects also play a role. A weaker euro—now trading around $0.98—boosts the earnings of European exporters when translated back to euros. Companies in Germany’s auto sector, French luxury goods, and Swiss industrials are among the beneficiaries. If the euro weakens further, the earnings tailwind could be significant.

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Risks That Could Derail the Comeback

No outlook is complete without a sober assessment of risks. The J.P. Morgan report is cautious, listing several potential pitfalls that could prevent the rotation from materializing.

Geopolitical risks top the list. Escalation of the war in Ukraine, particularly any disruption to energy supplies or infrastructure, would hit Europe disproportionately. Trade tensions with China over electric vehicles and steel tariffs remain a flashpoint. Political instability in key EU economies—France’s budget disputes and Germany’s coalition fractures—adds a layer of policy uncertainty that could weigh on investor confidence.

[IMAGE: Risk matrix graphic with axes of probability and impact, highlighting top three risks]

Economic risks include a slower-than-expected recovery in China, which is a major export market for European companies. A hard landing in the United States would also hit Europe through trade and financial linkages. And a renewed spike in energy prices—for example, due to a harsh winter or Middle East disruption—would erode corporate margins in energy-intensive industries.

Implementation risk relates to the ECB itself. If the central bank misjudges the pace of rate cuts—cutting too slowly and keeping monetary conditions tight, or cutting too fast and reigniting inflation—it could hurt both growth and market sentiment. The report warns that policy errors are always a risk, especially in a fragmented political landscape.

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What to Watch: Key Catalysts Ahead

For investors considering a position in European stocks, the next few months offer several signposts that will indicate whether the J.P. Morgan forecast is playing out.

ECB interest rate decisions: The ECB meeting in December 2025 and the first meeting of 2026 will be critical. A dovish pivot—perhaps a 50-basis-point cut along with a clear signal of further easing—could be the spark that fuels a European equity rally. Markets are currently pricing in three cuts by mid-2026, but any deviation from that path will move markets.

Q3 and Q4 corporate earnings season: European companies are reporting earnings in late 2025. The key metric is margin resilience. If companies in sectors like luxury goods, autos, and chemicals can maintain or even improve margins despite weak demand, it will validate the thesis that European earnings are more robust than feared. Watch for guidance from LVMH, Siemens, and Santander as bellwethers.

U.S. jobs and inflation data: A slowdown in the U.S. economy would weaken the dollar and potentially accelerate the Federal Reserve’s rate cuts, both of which are tailwinds for European stocks. Conversely, strong U.S. data could keep the dollar elevated and delay the rotation. The November payrolls report and the December CPI release are therefore critical external catalysts.

European political developments: The new European Commission’s fiscal rules implementation and Germany’s ability to pass a 2026 budget will affect sentiment. Any breakthrough on EU-wide defense spending or green investment programs would be a positive signal.

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Conclusion: A Window of Opportunity or a False Dawn?

J.P. Morgan’s November 2025 report offers a compelling case that the underperformance of European stocks may be ending. The valuation gap is historically wide, earnings have been more resilient than expected, and structural catalysts such as fiscal stimulus and defense spending are building. Monetary policy divergence could soon shift in Europe’s favor.

Yet the path to outperformance is not guaranteed. Geopolitical risks, economic fragility, and policy missteps could derail the rotation. For investors, the key is to watch the catalysts laid out above and act on confirmation rather than anticipation.

In a world where U.S. equities have dominated for so long, the idea of a European comeback may feel contrarian. But contrarian bets often yield the best returns when the data supports them. With J.P. Morgan’s analysis as a guide, the coming months will determine whether European stocks finally deliver the catch-up that value investors have been waiting for.