Is the current bull market in European stocks coming to an end? Don't forget about the euro

The recent rebound in U.S. stocks has weakened investors' confidence in the sustainability of the European rotation strategy, but some analysts believe that the strong performance of the euro exchange rate provides new opportunities for investors. As of last Friday's close, the STOXX Europe 600 Index has risen 6.6% this year, while the S&P 500 Index has increased by 6.8%. In March, the STOXX Index was leading by 10 percentage points, but the strong rebound of U.S. tech stocks reversed this situation. However, investment strategists believe that despite the relative underperformance of European stocks, the euro remains strong in the currency market, providing new opportunities for investors. The euro has risen 14% against the U.S. dollar this year and is currently approaching a four-year high, nearing the 1.20 USD mark. If the euro continues to maintain its strength against the U.S. dollar, it will support returns on European stocks and erode returns on U.S. stocks. Euro Strength Expected to Continue, May Support Stock Returns At the beginning of the year, many analysts predicted that the euro would fall below 1 USD; however, it is now approaching 1.20 USD. George Saravelos, head of foreign exchange strategy at Deutsche Bank, pointed out in a report that foreign investors do not need to sell U.S. assets to weaken the dollar; simply refusing to buy more is sufficient. According to a previous article by Jianwen, the market is generally optimistic about the future performance of the euro, with several institutions predicting that the euro will rise to 1.20 USD against the dollar by the end of the year or within the next 12 months. The last time the euro reached the 1.20 USD level was four years ago. However, if the resistance level of 1.17 USD is not broken, it may trigger a wave of profit-taking or capital flow rebalancing. Exchange rate fluctuations also affect the returns of stock investors. Although the S&P 500 Index has reached an all-time high, it has fallen 9% when priced in euros compared to the February peak. DWS's Ronner stated: For euro-based investors, exchange rate fluctuations have significantly eroded this year's returns on U.S. assets. Is the Bull Market in European Stocks Coming to an End? Marija Veitmane, head of equity research at State Street Global Markets, stated that the rebound in U.S. stocks since mid-April is partly due to the "trade war turning into trade negotiations." However, the real turning point occurred during the earnings season when "CEOs of tech companies indicated that profits would be very strong." The technology sector accounts for about one-third of the S&P 500 Index, and this sector has risen 24% since early April. Nvidia, as the world's largest company by market capitalization, has seen an increase of 45%, while the European market lacks similar star stocks. Madeleine Ronner, senior equity portfolio manager at DWS, pointed out that tariff announcements show how quickly market sentiment can change and the risks associated with high valuations in the U.S. She believes that European valuations are more reasonable. ** DWS expects that the GDP growth of the United States and Europe will be roughly similar in 2025 and 2026, which will provide sustainable momentum for the profitability of European companies. The 12-month forward price-to-earnings ratio of the S&P 500 Index averages slightly above 20 times, while the STOXX 600 Index is less than 15 times. Investor enthusiasm for the European stock market is mainly concentrated in the defense and banking sectors. According to estimates by BNP Paribas Exane, the defense sector has risen by 50% this year, and the banking sector has increased by 28%, contributing to over 50% of the returns of the STOXX 600 Index, despite accounting for only 16% of the index weight. However, valuations have become excessively inflated, with the forward price-to-earnings ratio of Rheinmetall exceeding 50 times, even higher than the approximately 30 times for Apple and Microsoft