Why European stock markets have reached new highs
Buoyed by two years of positive returns, European stock markets got off to a flying start in 2025. The stock indices in Germany (DAX) and Switzerland (SMI) reached new highs, leaving the previously dominant US stock market trailing in their wake. Our independent analysis delves into the key drivers behind this shift, uncovering the factors fuelling Europe's market momentum.
Economic Environment
The Global Purchasing Managers' Index (PMI), which is recognised as a leading indicator, has recently crossed the 50 mark again, indicating an improvement in the economic environment. As 2025 begins, most major economies are experiencing a noticeable uptick in economic momentum.
Source: LSEG Datastream, Colin&Cie
Expected corporate earnings
The interest rate cuts by the central banks in Germany and Switzerland, in particular, which took place last year and this year, are having a stimulating effect on the economic environment. However, their full impact will only be felt after a delay of several months. The European Central Bank (ECB) initiated its rate-cutting cycle in June 2024, lowering the key interest rate from 4.00% to 2.50%. The Swiss National Bank (SNB) started as early as March 2024 and has since reduced the key interest rate from 1.75 % to 0.50 %. As a result, the earnings expectations for German and Swiss companies have risen significantly in both a European and global comparison.
Expected corporate earnings – year-over-year changes
Source: LSEG Datastream, Colin&Cie
Market Technique
Technical analysis continues to signal a positive trend for stock indices in Germany and Switzerland. This is supported by the fact that the price is trading above the 50- and 200-day moving averages in each case.
Market technique – German stock index (DAX)
Source: LSEG Datastream, Colin&Cie
Market technique – Swiss stock index (SMI)
Source: LSEG Datastream, Colin&Cie
Conclusion and a look at the USA
To summarise, lower interest rates in Germany and Switzerland are improving the economic environment and fuelling expectations of rising corporate profits. This in turn is boosting share prices, leading to new highs for the DAX and SMI.
Meanwhile, the US stock market, which delivered annual returns of around 25% over the past two years, has started 2025 with a negative performance, particularly due to a slowdown in the technology sector.
Adding to market uncertainty is the new US government's unclear fiscal policy direction. Under the Biden administration, large-scale economic stimulus programs played a crucial role in driving growth. However, the current lack of clarity on future policies is unsettling investors. The high valuation or price-to-earnings ratio (P/E ratio) of US equities is also causing some investors to act somewhat more cautiously. A high P/E ratio generally indicates that a stock or stock market is expensive and unattractive. With a P/E ratio of almost 22, the US market is among the most expensive globally. It is followed at some distance by the stock markets in Switzerland, Germany, Europe (Stoxx Europe 600) and emerging markets.
Valuation of stock markets in a global comparison
Source: LSEG Datastream, Colin&Cie
Although the economic environment and expected corporate profits are supporting the performance of equities, some indicators (valuations, trend channel, political and economic upheaval), particularly in the US, suggest that - after two years of above-average returns from a historical perspective - a correction in equities is possible.
Disclaimer - legal notice
This publication was produced by the Investment Office of the Colin&Cie Group. The information and opinions contained in this document are based on sources we believe to be reliable. However, we cannot guarantee the reliability, completeness or correctness of these sources. All information and quoted rates are only up-to-date at the time of this publication and are subject to change at any time without notice. The content is based on numerous assumptions made by the Colin & Cie Group. It should be noted that different assumptions can lead to materially different results. The forecasts and assessments are only current at the time this publication is prepared and can change at any time without prior notice. Past performance of an investment is not a guarantee of future results. Certain investments can experience sudden and substantial losses in value. This information and views do not constitute a solicitation, offer or recommendation to buy or sell investment instruments or to carry out any other transactions. We recommend interested investors to consult their personal advisor before making decisions on the basis of this document so that personal investment goals, financial situation, individual needs and risk profile as well as further information can be duly taken into account as part of a comprehensive consultation. The information contained in this publication is marketing material that is distributed for advertising purposes only.
