On Tuesday, European stock markets snapped a three-day losing streak following news that US President Donald Trump may soften his tariff stance. The pan-euro Stoxx 600 index rose 0.67%, the DAX jumped 1.13%, and the CAC 40 climbed 1.08%.

In the year to date, Europe’s equity markets continue outperforming their US counterparts, with the euro Stoxx 600 gaining 8.9% and Germany’s DAX up 16%, while the S&P 500 is down 3% and the Nasdaq fell 5.4%.

Relatively cheaper valuations, expectations for surging defence spending, and more accommodative monetary policies may have all contributed to the rally in European markets this year. A possible permanent ceasefire in the Ukraine war has also provided optimism toward Europe’s economic outlook. Goldman Sachs analysts expect European equities to continue the uptrend with a 5-6% upside for a 12-month target.

The recent economic data points to upside potential for the block’s economic growth. On Monday, S&P Global released better-than-expected flash manufacturing Purchasing Manager Indexes (PMIs) for major economies. While the data remained in contraction, the decline in Germany was the mildest since September 2022. “Some firms attributed this rise to stronger domestic demand and clients replenishing stocks,” the report stated.

On the other hand, Trump’s tariffs and his efforts to reduce the US deficit led to growing uncertainties about the country’s economic outlook, which, in turn, hurt equity valuations, particularly in the well-known tech stocks. On Tuesday, data from the Conference Board showed that the US consumer expectations tumbled to the lowest level in 12 years.

Banking stocks shine

Europe’s financial sector was the top performer in the euro Stoxx 600 Index, up 23% in the past three months. In 2024, the banking sector gained 25%, compared with the Stoxx 600’s 5% rally. Robust earnings results, generous dividends, and share buyback programmes have all contributed to the sector’s outperformance.

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Eurozone’s major banking stocks, including Banco Santander, BNP Paribas, and Intesa Sanpaolo, all hit all-time highs on Tuesday. Particularly, the Spanish lender Santander’s share surged 49% this year, becoming the first Eurozone bank topping a €100 billion market capitalisation, alongside Switzerland’s UBS and the UK-based HSBC. BNP Paribas experienced a 37% year-to-date rally, with a capitalisation of €92bn. Shares of Italy’s biggest lender, Intesa Sanpaolo, also jumped 2.8% on Tuesday and gained 28% this year, making it the third-biggest bank in the EU, with a market valuation of €88bn.