The European stock market is outperforming the U.S., marking a rare shift in global equity leadership. Year-to-date, European indices have surged 10%, driven by a strong rotation into value stocks. The shift has seen banks, autos, and mining stocks gain momentum, with the value factor returning 8.6% on a long-only basis—trouncing growth stocks, which have risen just 2.9% in comparison.
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Strategists at JPMorgan note that for Europe’s rally to continue, earnings growth needs to turn positive. While regional markets have historically lagged the U.S. due to weaker earnings, recent fiscal stimulus measures in Germany and China are fueling optimism. Higher bond yields have also played a role, boosting financial stocks without yet squeezing margins. Meanwhile, valuations remain attractive—value stocks are still trading at a 50% discount to growth peers, offering further room to run. But with some sectors already rallying hard, traders are keeping an eye on tariff risks and slowing economic growth.

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Can the Value Trade Keep Running, or Is a Pullback Coming?

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Despite the recent surge, the value rally is approaching a critical juncture. Earnings have been the key driver, with banks and energy stocks leading the charge. Basic resources and auto manufacturers have also remained resilient, seeing relatively few downward revisions to their earnings estimates.

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European banks, one of the biggest winners, may be vulnerable to profit-taking after their steep climb. UBS strategists warn that potential tariff escalations could hit financial stocks hard, advising traders to hedge through options. Meanwhile, Bank of America remains bullish on value, arguing that its discount to growth stocks remains too steep to ignore. As markets enter a potential recovery phase, the debate is whether value’s momentum can sustain or if headwinds—like slowing fiscal support—will trigger a reversal.

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