European equities rebound, but no shortage of insiders on the horizon
Signs of recovery for European equities? Things have certainly been improving in recent months compared to the early part of 2024, but trade tensions and geopolitical risks may derail this fragile recovery.
In recent months, the Euro Stoxx 50 index has shown positive performance. According to data from Il Sole 24 Ore, the index has risen 4.59 percent in the past three months and 5.48 percent in the past six months.
In the chart above we look at the relative strength relationship between the index of major European stocks and the S&P500. We can see how from the low touched last November, the indicator has climbed back up, even surpassing the mid-term average. Similar results are obtained by comparing two other interesting indices, such as the STOXX 600 (Europe) and the Russell 3000 (USA).
This is undoubtedly significant recovery of the European index, attributable to several factors:
- Reduced recession fears: The improved economic outlook in the Eurozone helped boost investor confidence, supporting the index’s growth.
- Solid corporate performance: Many component companies in the Euro Stoxx 50 reported financial results above expectations, fueling market optimism.
- Accommodative monetary policies: Expectations of further rate cuts by the European Central Bank in 2025 aim to stimulate the economy, supporting a positive environment for equity markets.
Currently, the trend is also supported by declining volatility, as shown in the chart of the VSTOXX (the volatility index) below.
The question now is whether this recovery will be able to withstand the pitfalls on the horizon: U.S. tariffs, the risk of ungovernability in Germany, the return of inflation and a more cautious ECB. From a technical point of view, European equities are in a strengthening phase in the short term, but they are also very close to important resistance zones. A situation that could dampen the energy of the recovery.
