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Since late February and the stormy meeting in the Oval Office between Volodymyr Zelensky, Donald Trump and JD Vance, we have witnessed a market sequence that will remain etched in investors’ memories for a long time to come. This pivotal moment marks an acceleration of history and the establishment of a new world order structured around three competing poles with reduced porosity. The United States, with its isolationist tendencies, emerging countries, led by China, and finally Europe.
This turning point is understandably causing concern, but we must not lose sight of the fact that this type of disruptive environment also presents long-term opportunities for investors. In this regard, Europe could take advantage of a salutary collective awareness to reform itself with the aim of achieving energy, industrial and military autonomy.
This is likely to be a fundamental trend for the next ten years, and investors would be well advised to follow it in order to normalise the link between the economic weight and stock market weight of each pole. The United States accounts for 27% of global GDP and 62% of global market capitalisation. In contrast, the eurozone accounts for 16% of global GDP but only 10% of global market capitalisation.
Normalisation of valuations
In the shorter term, we are currently seeing a normalisation of valuations across different market segments, as we predicted in our article at the beginning of February. In an uncertain environment, investors have no choice but to focus on valuations, especially as the current fundamental situation continues to present inefficiencies that can benefit active equity managers.
From a geographical perspective, we note that expensive regions (high P/E ratios) are also those that are overvalued relative to their historical valuation standards. This is the case in the United States and India. The sharp underperformance of Indian and US indices since the beginning of the year (down 7.3% and 13.5% in euro terms respectively as at 30 April 2025) has therefore partially corrected these excesses. This process is probably far from over, as the US still appears to be significantly overvalued. This is all the more true given that the reindustrialisation of the US economy is likely to gradually change the industrial mix of the US investment universe and lower the valuation multiples of the local market.
The opposite process is underway for the cheapest regions, which are also those trading at a discount. The strong performance of Southern Europe since the beginning of the year (MSCI Spain +20.2%, MSCI Italy +12.2%) is consistent with this logic. It is reflected in a revaluation of these regions, which are gradually approaching their historical fundamental levels.
The normalisation of geographical valuations observed since the beginning of the year
The normalisation of valuations across the various segments that make up the European market
The same type of normalisation phenomenon can also be observed within the European market. The cheapest sectors, mainly value sectors, are outperforming and becoming more expensive as they move closer to their historical fair value. This is particularly the case for banks, the best-performing European sector since the start of the year (Stoxx Europe Bank NR +22.5% as at 30 April), telecoms (+13.8%) and utilities (+16.1%). This observation also applies to small and mid caps, which have been outperforming strongly since the end of February (Stoxx Europe Small NR -1.2% vs Stoxx Europe NR -4.5% from 28 February to 30 April).
Conversely, highly valued sectors, which are also those whose current valuations exceed historical standards, tend to underperform and become cheaper. The emblematic tech sector, down 4.3% since the beginning of the year, is a perfect illustration of this.
Article by Stéphane Levy,
Strategist and Head of Innovation at Chahine Capital
