European investors are already showing signs of souring on US stocks against the backdrop of Trump’s trade wars and concerns about the strength of the US economy. This shift comes amid a reversal of fortunes so far in 2025 in performance terms, with US stocks slumping and European shares rallying.
This potential change of direction is already evident in weekly ETF flows, which, if sustained, would represent a dramatic change from 2024, when European investors chased high-performing US stocks. From Feb. 14 until the week ending March 14, European investors withdrew EUR 2.852 billion (C$4.40 billion) from US equity ETFs, while shifting EUR 14.614 billion (C$22.60 billion) to European equity ETFs.
The chart below shows how the trend of US dominance reverses from the week of Feb. 7.
During 2024, Europe ETF strategies took in EUR 11.91 billion (C$18.42 billion) but EUR 99.90 billion (C$154.57 billion) were poured into US Equity ETFs.
Although it’s early days, the ETF data is a good indicator of recent trends but the full monthly fund data for March, which includes overall numbers for all fund types, for is not available yet.
The monthly data from Morningstar Direct from February shows where investor money went and how that compared with January.
Looking at full-month fund flow data for February, two Morningstar categories received the lion’s share of investors' money: Europe large-cap blend equity and eurozone large-cap equity.
Long-Term Fund Flow Trends: US Equities Dominate
The longer-term trend is obvious: investors have preferred US equities to European equities. This can be clearly seen by monthly flow data into European large-cap blend equity and US large-cap blend equity categories, the two most representative categories, and where most assets are concentrated.
European Stocks Gain Momentum: The Key Drivers
This change in European investors' preferences comes against the backdrop of better relative stock market performance of the old continent’s markets when compared to the US. From the beginning of the year until March 20, the Morningstar Europe Index has risen by 9.0% in euros compared to a fall of 8.1% for the Morningstar US Market Index, with the American market even falling into a correction, which is defined as a 10% decline from the peak.
But there are other factors that support this potential shift.
One of these is relative valuation: the sharp rise in the US market over the last two years has made the US stock market more expensive compared with Europe. More recently, the fall in the US stock market and the rise in European stock markets has meant that this valuation differential has narrowed substantially.
In addition, monetary policy has played an important role. While the Federal Reserve has held back expectations of aggressive rate cuts due to the strength of the US economy, the European Central Bank has maintained a more accommodative stance, which has favored European markets.
Finally, Germany has made a radical shift in its fiscal policy with an ambitious infrastructure investment plan, eliminating the debt brake, a change that marks the end of austerity and could boost gross domestic product growth, strengthening the old continent’s stock markets.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
