European stocks have been on a bull run this year — but the region’s outperformance over the U.S. is narrowing as investors assess structural challenges, the long-term outlook and the American AI story. Earlier this year, volatility arising from U.S. President Donald Trump’s trade policies sparked widespread demand for assets outside of the United States . One of the beneficiaries of this movement was Europe , where investors saw a stable but undervalued market. Since the beginning of the year, the outperformance of major European bourses over their U.S. counterparts has narrowed significantly. At the end of the first quarter, the region’s key indexes — as shown in the charts below — were outperforming their U.S. counterparts by an average 14 percentage points. That lead has now shrunk to just over 2 percentage points on a year-to-date basis. Investors ‘on the fence’ In its September European Fund Managers Survey — which polled 196 panelists who collectively manage assets worth $490 billion — Bank of America found that investor confidence in Europe had taken a hit. “The view of EU exceptionalism has been dented, with the EU equity overweight slipping further and the gap to the continued US equity underweight falling to the lowest level since February,” BofA’s strategists said in a report accompanying the findings. “Respondents are also now on the fence over whether Europe’s structural underperformance can come to an end, after believing until recently that it could, given German fiscal policy, EU defence spending and integration progress.” However, it was noted that the majority of regional fund managers expected “mild upside” for European equities in the near term. Deutsche Bank also warned last week that a recalibration could be on the horizon, noting that investors were becoming increasingly critical of the German “fiscal bazooka” that had been a major driver of the regional rally this year. “It is clear from our client conversations that the enthusiasm about Germany’s historic fiscal reforms has evaporated over the summer,” Deutsche Bank Research analysts said in a note. “We believe the sugar rush is coming and likely to boost cyclical growth for a while. Yet the long-term growth implications look dimmer than in the spring.” Schroders strategists, meanwhile, held their neutral rating on European equities and upgraded U.S. stocks to a positive in a recent note. “We continue to see a low risk of recession in the U.S. Lower real yields, combined with decent corporate earnings and looser fiscal policy, lead us to upgrade our view on equities,” they said. “Whilst attractive opportunities do exist [in Europe], particularly in mid-caps, larger-cap names are acting as a drag on the overall index.” European underperformance ‘has deep roots’ CNBC asked 10 Europe-based asset managers whether their views on the continent were shifting amid the apparent revitalization of American assets . Most said they saw opportunities in Europe, but suggested the region still has obstacles to overcome. Eleanor Ingilby, head of high net worth at wealth management firm Atomos, told CNBC that while there were “selective opportunities” in Europe, her team was taking a cautious approach. “Europe’s structural underperformance has deep roots — demographics, productivity, fiscal policy — so a wholesale reversal looks unlikely,” she explained. “But alongside the growth outlook improving, we’ve also seen corporate profitability bring some positive surprises. We believe that these improvements could help Europe’s relative story stabilize over the long term.” She also cautioned that political risk in the region “shouldn’t be overlooked,” pointing to recent upheaval in France , the European Union’s second-biggest economy. Brian Mangwiro, an investment manager within the multi-asset group at Barings, also said he had been “selectively bullish” on Europe this year. He noted that the region “generally offers deep value opportunities” as opposed to growth stocks, which can offer larger returns over shorter periods . “We always viewed this as a tactical opportunity, not a long-term structural position,” he said. “From a top-down perspective, we still find it challenging to be structurally constructive Europe.” Mangwiro told CNBC there were several reasons for this viewpoint, including a persistent low-growth environment in Europe, downward earnings revisions, persistent low inflation and slow AI adoption. “In the long run, unless we see aggressive adoption of key recommendations within the Draghi report , we believe the structural underperformance of European equities, especially vs U.S., is likely to continue.” Louise Dudley, a London-based portfolio manager at global investment manager Federated Hermes, said that while there were positive factors at play for Europe, structural headwinds remain — and noted that demand for the region’s risk assets is generally muted. “Europe remains more exposed to external demand shocks [than the U.S.], especially from China, which is aggressively expanding its footprint in a range of industries including automotive, healthcare, and AI sectors,” she said. “Political instability in France … continues to weigh on sentiment.” France has been grappling with political and economic turmoil in recent weeks, with the country seeing nationwide protests , the ousting of its Prime Minister and volatile government borrowing costs . “Outside of the Defense sector, where spending is rising sharply due to geopolitical tensions, risk appetite for European equities remains subdued,” Dudley added. Prashanth Manoharan, who heads up EMEA execution consulting at trading agency Liquidnet, told CNBC that while he had been bullish on Europe since the third quarter of this year, valuation discounts were narrowing, and it was becoming clearer that fiscal spending could take time to trickle into corporate earnings growth. “At the same time, the U.S. has experienced renewed enthusiasm for technology, particularly as AI continues to demonstrate its ability to enhance productivity and profitability, drawing further investor attention to the sector,” he said. On Monday, all three of Wall Street’s major averages closed at record highs , as Nvidia ‘s plans to invest $100 billion in OpenAI reignited the AI rally, but a three-day winning streak came to an end during Tuesday’s session. “In the short term, given [ongoing challenges] and the continued outperformance of U.S. tech sectors, I expect European markets to remain relativ el y muted or volatile,” Manoharan said. “However, with fiscal stimulus and structural reforms aimed at enhancing the region’s competitiveness, I believe Europe is well-positioned for stronger performance over the next decade.” Lingering bullishness The hype around European stocks might be fading, but most investors — as noted in BofA’s survey findings — seem to be pricing in further upside. Of the 10 market participants who spoke to CNBC, eight had a positive view on the region’s equities, with banking, defense and small-cap stocks namedropped as highlights. However, there was division on whether Europe’s structural underperformance was over. Seven of the asset managers said the trend could be reversed if certain conditions — like capital market integration and economic policy changes — were met. “I’ve been positive on Europe, and that view still holds. What we are currently witnessing in Europe is an accelerating regime change in the face of deglobalization, geopolitical instability and declining international competitiveness,” said Nick Wylenzek, a macro strategist at Wellington Management. “I expect Europe’s more domestically orientated economies such as Spain or Italy to do comparatively better than the export-focused core countries,” he added. “While the U.S. market offers unique exposure to the ongoing AI boom, beyond the large AI winners, Europe’s positioning looks more compelling.”
