Based on the latest seasonally and calendar-adjusted quarterly data, preliminary growth for the eurozone and the EU in 2024 will be 0.7% and 0.8%, respectively. For this year, the European Central Bank (ECB) cut its growth forecast for the EU to 1.1%. ECB President Christine Lagarde commented that the euro area economy “is set to remain weak in the near term.” However, despite this downbeat outlook, investment analysts see some bright spots in the Europe market outlook.

While Goldman Sachs expects an area-wide growth of 0.8% for 2025, notably below the 1.0 to 1.2% consensus, they see “several reasons for continued growth, rather than a Euro area recession”.

„Growth momentum remains modestly positive; consumption is likely to recover given rising real incomes and elevated savings; and we expect the South to show continued resilience compared with the North,” says their Europe Market Outlook 2025.

While Goldman Sachs expects Spain to outperform again, Germany, Italy and France are projected to have the weakest growth.

The subdued growth and easing inflationary pressure prompted the European Central Bank to cut the deposit facility, its key rate, by 25-basis-point to 2.75% with effect from 5 February 2025.

There are ample risks to Europe’s outlook. Ombretta Signori, Head of Macroeconomic Research and Strategy at Ofi Invest Asset Management, sees the potential of exacerbating political tensions in France and Germany or a more intense or broader trade war to weigh on European business confidence. However, a positive turn for the region could be a potential peace deal between Ukraine and Russia.

European Equity Outlook

While European markets gained ground in 2024, there are still stumbling blocks ahead, such as the Trump 2.0 presidency, China’s weakness, the regional economic slowdown, higher energy prices and the war in Ukraine.

“However, these are already reflected in share prices in the form of high-risk premiums. Europe is currently trading at a record-high valuation discount of around 40% to US equities on a P/E basis,” points out Berenberg. They see opportunities particularly in European small caps.

Deutsche Bank sees bright spots in German equities. “In 2025, we expect high-single-digit earnings growth in Europe, which, coupled with low valuations, should provide moderate return prospects. Financials and industrials stand out favourably as our sector picks. We expect the STOXX Europe 600 to reach 525 points by the end of 2025 and see the DAX at 20,500 points,” says Christian Nolting, Global CIO at Deutsche Bank.

Lazard Asset Management is equally optimistic for the European equity outlook, saying that investors can draw some comfort from the recent shift in the interest rate environment. “We believe looser monetary policy could serve as a tailwind for European equity prices over the near term, especially since European companies and consumers are generally more rate-sensitive than many of their global counterparts,” opine the Lazard analysts.

They highlight that declining cost of capital could benefit cyclical sectors like chemicals and commodities, where valuations appear “overly discounted” relative to their long-term potential.

Allianz Global Investors expects broad-based earnings growth in Europe in 2025, with certain sectors likely to outperform. The tech sector is anticipated to return to double-digit growth, driven by AI-related capital expenditure and recovering demand for non-AI semiconductors. Industrial goods should benefit from structural trends like electrification, while European pharmaceuticals are expected to gain from successful drugs and a stronger USD.

However, consumer-related sectors face uncertainty as price increases continue to be absorbed and consumer sentiment in China remains a key factor, particularly for European luxury brands. Additionally, European banks may see more subdued earnings growth following strong years fueled by net interest margins.

European Bonds Outlook

For bonds, the investment landscape is unlikely to be hostile next year, opines Pictet Asset Management.

The investment team highlights the UK, for instance. “We expect gilt yields to fall to 4% from the current 4.4%, supported by a more favourable inflation outlook compared with the rest of Europe,” writes the Pictet Asset Management Strategy Unit and adds: “Notably, the spread between UK and German ten-year bond yields has risen above 200 basis points – matching the historic peaks during the sterling crisis of the early 1990s and the budget crisis of 2022.”

Alliance Bernstein’s Head of European Fixed Income, John Taylor, also expects the prospect of significantly lower interest rates in Europe and stronger growth in the US to provide a favourable backdrop for the euro and sterling bond markets over the next two years. “We expect a particularly favourable environment for bonds with 0–10 years to maturity; their yields would be pulled lower as central banks cut interest rates. We also expect some steepening of the yield curve, as longer-dated European Treasuries could be hurt by the fiscal deterioration we’ve seen across governments globally,” Taylor adds.

Lazard also sees a positive environment for European bonds amid easing rates, with a preference for Nordic high yield debt given strong fundamentals and higher spreads.

“Overall, looser monetary policy and declining yields contribute to a more constructive backdrop for European bond investors going forward,” concludes David Zahn, Head of European Fixed Income at Franklin Templeton. However, he remains cautious given a “significant divergence between European countries in terms of economic growth and political stability—with notable elections coming up in Germany and France”.