Don't count out European equities in 2025, Schwab strategist says

Forgive us for being "wicked," but Dorothy's “There’s no place like home” mantra may be wrong. At least when it comes to global investing in 2025.

It’s hard to argue against overweighting domestic stocks relative to foreign markets - both developed and emerging - after back-to-back world-beating years for the S&P 500. America’s S&P 500 is up 29 percent to date in 2024 after returning 26 percent in 2023.

By comparison, the iShares MSCI Japan ETF (Ticker: EWJ) is up 12 percent year-to-date, iShares Europe ETF (Ticker: IEV) 5 percent, iShares MSCI China ETF (Ticker: MCHI), 19 percent and the iShares MSCI Emerging Markets ex China ETF (Ticker: EXMC) has returned 7 percent so far this year.

Based on these returns, one can certainly understand Dorothy’s push for sticking with US stocks when creating an investment portfolio. And especially when most Wall Street analysts are forecasting a continuation of US market leadership in 2025 due to the tax and regulation cuts promised by the incoming Trump administration.

Nevertheless, Jeffrey Kleintop, chief global investment strategist at Charles Schwab, says it may be time to change course in 2025 thanks to “earnings growth that may actually be better overseas.”

“It's been much better in the US for a while and, of course, earnings tend to drive stock prices,” Kleintop said. “But in this recently reported third quarter we actually saw European companies outpace US corporate earnings growth. That could be a sign of things to come next year.”

When it comes to Europe, Kleintop sees better global economic growth, better earnings growth and rising valuations in the coming year. He points out that valuations in Europe are currently below their historical averages and well below the pricey multiples in the US. And with an improving outlook for growth and the potential for up to seven rate cuts by the European Central Bank next year, he would not be surprised to see double-digit returns from the region going forward.

Yet, he remains far less sanguine on Chinese stocks, even amid sthe massive stimulus being pumped into the economy by the Chinese government.

“I think China continues to over promise but under deliver, primarily because the stimulus is not going to where it's really needed,” he said. “Their strategic initiatives are towards semiconductor self-sufficiency and other areas, but they are not addressing the property market, which is the real source of the downturn.”

And when it comes to the threat of President-elect Trump’s tariff policies, Kleintop does not see them making a massive impact at home or on export dominated nations like China.

“I think the bark may be worse than the bite on tariffs,” he said.

And what about the idea of investors simply letting their S&P 500 winnings ride in the new year and staying overweight US?

Kleintop says that strategy could very well work as long as the market stays technology focused. But after two magnificent years of US returns led by the so-called Magnificent 7 stocks, he believes the time has come for a change in sector leadership as well.

As for the countries that struggled with recessions in recent years, Kleintop sees some reversions to the mean. In the end, this is good news for investors worldwide, he said.

“We saw a lot of rolling recessions outside the US over the last six quarters from Germany, Canada, and Japan. Many of those other nations that did experience a recession are rebounding now,” he said. “So as we look out to 2025, regardless of the political dynamic, we've got improving global economic growth and earnings growth. I think it should help support stocks.”