The Silver Lining for Europe of Trump Peril

European stocks have had a sensational start to 2025. This has narrowed the differential to the mighty S&P 500 by 10 percentage points in Europe's favor. Yet even with the prospect of the Ukraine war ending, there’s a lot of hope in the price. The big question is whether the gains are likely to continue. Massive reconstruction and lower energy costs are the key ingredients to this souffle continuing to rise, but the bakers have to play their part too — a lack of rapprochement between Washington and Brussels could deflate it in a trice.

Diversification back into Europe combined with renewed US investor demand could be big swing factor, but seeing is very much believing as the euro economy is on its knees. There’s been $145 billion-equivalent of net outflows from the European equity markets in the past three years. That contrasts markedly with the $1.3 trillion of net inflows into US-listed stocks.

It’s not just soaring input costs that are crippling euro industrial output but a paucity of export growth. Sanctions on Russia have largely closed off a lucrative market, but the struggling behemoth of China is the bigger handicap. Nonetheless, German manufacturing output, if measured on the more reliable gross value added basis, has held up surprisingly well — partly due to increased manufacturing-services revenue, but also due to higher-value products being sold.

Liquid natural gas has risen more than 10% this year on dwindling storage levels, but a Russia-Ukraine peace deal could cut prices by more than one-third, Goldman Sachs Group Inc. analysts say. The European Union has never stopped importing Russian gas, or even put sanctions on it, but there's undeniable hope that flows from the damaged Nordstream pipelines bringing LNG into the north of Germany could be restored. The lifting of the general moratorium on Russia hydrocarbons would reset the energy playing field, though that's been honored more in the breach than the observance.