Equity markets have performed well recently, driven in particular by renewed optimism in the US around Artificial Intelligence. It’s tempting to dismiss some of this as exuberance about a long-term future, but digging into the shorter-term data, we can see more immediate signs of optimism.
The chart below shows expected earnings growth for 2025 in the US and Europe, and how those expectations have changed over time. At the start of the year, analysts expected US equities to grow their earnings at around 14% this year – a pretty impressive result. European companies were expected to see around 8% earnings growth – more pedestrian, but still respectable.
As concern about tariffs began to rise, expectations for earnings growth started to drift lower in both the US and Europe – and that’s probably to be expected. Analysts usually start the year too optimistic about earnings and have to lower their estimates over the course of the year. In 2025, concerns about tariffs exacerbated that trend.
But after the second quarter results, we can see an interesting divergence. Expectations for US earnings have actually risen, back above 10% growth, while European earnings expectations have continued to fall.
Digging into the European sector performance a bit deeper, we can see that expectations for sectors like financials, healthcare and defense have held up fairly well over the past few months. In contrast, earnings expectations for export-led sectors like autos, consumer durables (including luxury goods) and consumer staples have suffered.
The gap in expected earnings growth between the US and Europe has some implications for relative valuations. The chart below shows the relative Price/Earnings ratio between the US and Europe. It suggests that US equities remain highly rated relative to Europe, but not as much as they were for much of 2024, even though US equities have continued to climb.
What does this all mean? We think there are a few points to make. First, while there are lots of headlines about tariffs, geopolitics, the future of AI and technology, we think that US equities in particular have also reacted to solid profit growth today, as well as the prospect for stronger growth in the future.
Second, even though the valuation of US equities have risen, their relative valuation compared to Europe is more attractive than the peaks of 2024 – thanks to the stronger earnings performance.
Third, as we look forward, we should continue to focus on the profit outlook for these businesses as well as the longer-term themes – and on that basis, US companies, particularly in tech, continue to look healthy. It’s all a reminder of why, despite higher valuations and political uncertainty, we think that US equities remain an important part of a well-diversified, multi-asset portfolio.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
