From ugly duckling to star of the world's equity markets, the incredible transformation of the European stock markets at the start of the year.

We left them moribund, neglected and even 'uninvestable' for a large number of investors, and here are the stock market indices of the old continent at the head of the pack at the start of 2025.

The major European equity indices have posted double-digit returns (in dollars) in just two months. Managers, always quick to extrapolate trends, know that if we annualise these performances, we get increases of over 100% ... which we obviously won't get! The fact remains, however, that the advance is clearly superior to that of all the other major equity markets, and is starting to make asset allocators think.

Insofar as investors are rational actors and markets are efficient - at least in theory - this change in stock market dynamics must necessarily reflect an objective change in the fundamentals of this investment zone.

What about the European macroeconomy?

It has to be said that, for the time being, this upturn on the stock markets does not seem to be reflected in Europe's growth momentum.

Indeed, the outlook for GDP growth in the Eurozone, revised downwards gradually at the end of last year, has also been revised downwards at roughly the same rate at the start of this year.

If it is not the region's economic growth that justifies this renewed optimism, then perhaps it comes from investors' anticipation of a more accommodating monetary policy from the ECB (which would have a favourable effect on the discount rate of financial models and would therefore justify an increase in equity valuation multiples)?

But here again the answer is no. In fact, economists' forecasts between mid-December and mid-February have not changed, as the statistics below show:

If the explanation is not macroeconomic, it is necessarily microeconomic. Expectations of earnings growth for European companies have certainly been revised upwards significantly over the last two months, and it is these expectations that explain the good health of the European stock markets.

Unfortunately, once again, this assumption does not stand up to scrutiny. At the end of 2024, the consensus was for earnings growth of between 7% and 8% for the following year. This figure is exactly the same two months later.

Are investors' hopes and repositioning hidden drivers?

So how do you explain the rise in European equities when macro and microeconomic data have at best stagnated or even declined?

Financial scofflaws will say precisely that we can't, but that would be to overlook two significant explanatory factors: hope and positioning.

Hope that the situation will finally improve in the Eurozone thanks to a political changeover in Germany, which would enable the zone's main economy, which has seen no growth for the past two years, to pick up again. Hope for a peace agreement in Ukraine that would resolve the issues of energy supply and cost, and whose gigantic reconstruction project would benefit the economy of the entire continent. At this stage, it is difficult for economists to include these hopes in their forecasts, but it is possible for investors to quantify the additional stock market potential they represent.

Finally, how can we fail to explain performance in terms of flows and positioning? It will probably have escaped no one's notice that Europe is the area where outflows have been most massive in recent months. In the positioning surveys, it was also the region to which managers seemed to have the least exposure. As a result, even a modest repositioning towards European equities, to make up for an overweight, can result in a fairly strong performance from these assets. This is precisely what the fundraising statistics of recent weeks have shown.

In Andersen's fairy tale, the ugly duckling is transformed into a magnificent swan. Without dreaming of such a destiny for the European stock markets, some of the hopes expressed will have to be realised if these two months of stock market joy are not to turn into a swansong for the European markets.

The astonishing revenge of the European markets

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