Hot European Summer

Rested after a month on the beach, European portfolio managers returned to their offices this week to the unfamiliar comfort of a home market doing really rather well. European equities have been on an impressive run, outperforming global peers over the past few months. This is particularly true for larger names in continental Europe, where the Euro Stoxx 50 is outpacing the mighty S&P 500. Indeed, since the start of 2025, Europe has performed strongly despite both a tariff shock and an energy supply crisis. Since 2022, its banking sector – long seen as a value trap (I should know) – has outperformed US megacap technology stocks by no small margin. Strategists at Goldman Sachs call Europe “the secret outperformer”. They highlight a number of myths that its performance is puncturing: Europe has no growth. Yet in the first six months, earnings per share grew by 14% over the same period last year, the strongest pace in three years. Consensus now expects close to 18% EPS growth for the full year. Europe has low profitability. It’s lower than in the US, but European companies’ return on equity has improved markedly in recent years as margins and buybacks have risen, not least due to the contribution from banks. Free cash flow is strong too compared with the US, where datacenter spend is rapidly eroding cash flows. The European economy is stagnant. Perhaps. But only slightly over 40% of STOXX Europe revenues come from Europe; the rest is global. And in any event, the macro picture is improving. New orders indicators have pushed decisively higher across several large sectors such as banks, pharmaceuticals and industrial businesses. Europe is only cheaper than the US because it lacks growth. It currently trades on a 12-month forward multiple of 14.5 times earnings and while it’s true Europe doesn’t have the same crop of high-growth companies as the US, even adjusted for those, Europe looks inexpensive. No one is buying Europe. Well now they are. European equities are seeing the best inflows in ten years excluding 2021 (and we are close to matching 2021) driven almost entirely by foreign investors. We discussed the investment case for Europe in Catch Me If You Can in January 2025 (Time to Overweight Europe?). Since then, the market has performed well. One group that hasn’t participated, though, is retail. Whereas in the US, equity allocations form near 50% of household wealth, in Europe they remain stubbornly low. In the US, households now hold more wealth in stocks than they do in housing. Not so in Europe, where equity exposure languishes at around 20%. In the US, over 21% of households own stocks directly; in Germany and Italy, the figure is just 7%. That disparity carries through into trading activity. Retail investors account for around 20% of daily market turnover in the US; in the UK, by contrast, they account for less than 5%, according to Winterflood Securities. There are many reasons for the disparity. Government incentives are one. In the UK, stamp duty on stock purchases is a disincentive to buy. Pension reform has also steered investors away. At the other end of the scale, Sweden introduced a special tax-efficient account called an Investeringssparkonto (or ISK) in 2012 to make private investing in stocks and funds easier. It may be no coincidence that Sweden has especially high retail participation, with 22% of its households owning stocks. It also has a burgeoning IPO market, illustrating the benefits to overall market health of a broad and engaged retail investor base. Another reason – one I have floated before – lies in gambling legislation. Not all retail investing is long-term capital allocation; some of it satisfies the same appetite for risk and excitement as gambling. In the UK, consumers have long enjoyed access to sports betting, providing a natural outlet for speculative impulses that, in the US, may instead have found expression in stock trading. The liberalisation of prediction markets in the US is changing that equilibrium. So far, equity trading hasn’t been cannibalised, but it looks likely. In July, Robinhood customers did 197 million event trades per day – mostly sports bets – compared with 4.8 million equity trades. Events volumes have grown 20 times since July 2025, during which time equity volumes are up 30%. The firm now makes more money executing sports bets than it does stock trades. A final reason is market access. Commission-free stock trading lowered the cost of stock market entry in the US. The model relied on payment for order flow, which compensated brokers for lost commissions. But in Europe, payment for order flow was outlawed. A temporary carve-out for Germany expired at the end of June this year, requiring brokers such as Trade Republic to restructure their trade execution platforms. Policymakers are looking at several ideas to entice more retail investors to the market but as is usual in Europe, the thinking is not always joined up. One set of proposals tackles market structure. Compared with the US, European equity markets are deeply fragmented. A solution of sorts will be rolled out on September 14 when Europe launches its first “consolidated tape” – a single and near real-time overview of price formation across the multiple venues. Free for retail investors, it will allow anyone using investment apps to see the same basic information about stocks that large financial institutions have. A consolidated tape should make Europe’s fragmented liquidity easier to see. Whether it will make that liquidity easier for ordinary investors to reach is another question. To understand where Europe’s trading has gone – and why access increasingly depends on your broker, venue and even the time of day – read on.