Despite raging bull market in U.S. stocks, European stock gains to catch up in 2025?

TradingKey - As we look ahead to 2025, the bullishness of major Wall Street institutions on U.S. stocks is only growing. And outside of U.S. stocks, Wall Street expects European stocks may be poised for even better performance.

The Stoxx 600, a pan-European stock index, is up less than 6% in 2024, far less than the 25% rise in the U.S. S&P 500. Last year, European and American stock markets are in a cycle of interest rate cuts, in addition to the AI boom in U.S. stocks, the larger gap between the two to a certain extent reflects the difference in economic growth momentum.

[Europe Stoxx 600 Index Trend, Source: TradingView]

Last year, defense and banking stocks were winners for European stocks, while weak demand and a deteriorating business environment made it difficult for luxury stocks and traditional auto stocks.

Looking ahead to 2025, Deutsche Bank is bullish on European stocks over U.S. stocks. After lagging badly behind U.S. stocks last year, the outlook for European stocks in 2025 is going to be much brighter due to an improved economic outlook and lower corporate earnings thresholds, Deutsche Bank strategists said.

According to a Jan. 7 report from Deutsche Bank, the bank's strategists expect the Stoxx 600 to rise to about 590 points by the end of 2025, a 15 percent gain from today.

According to Bloomberg data, on average, strategists at financial institutions predict that the S&P 500 index will rise another 11% this year and the Stoxx 600 index will rise 4%. Deutsche Bank has the highest target price for European stocks.

Deutsche Bank pointed out that economic surprises continue to improve, political uncertainties are fading, Germany may offer more opportunities than risks, and China's potential stimulus plans increase the upside risks, which makes it "seem easy for corporate profits in the fourth quarter to exceed expectations".

Citi similarly recommends increasing bets on European stocks. According to Citi strategists, investors are overly pessimistic about European stocks despite the region's exposure to Trump's tariff threats, which are still expected to reach a 10% gain by 2025.

Citi notes that this year would be a good time to reposition European markets as bearish positions have reached extreme levels, negative earnings momentum is reversing, and with the broader backdrop of interest rate cuts and steady global economic growth, investors may turn to cyclical markets outside the US.

However, J.P. Morgan is cautious that Europe still faces structural challenges. Due to the intensification of trade uncertainties, the European economy may remain at a growth level below its potential, and the eurozone may be the weakest link in the global economic outlook.

ECB President Christine Lagarde previously said that risks to European growth in 2025 still tilted to the downside. The OECD lowered its expectations for economic growth in Germany and France this year to 0.7% and 0.9% respectively, down from 1.1% and 1.2% previously.