Innovation and equities in 2025: US makes headlines, Europe hides opportunities

As we head into 2025 and Donald Trump's inauguration approaches, markets are focused on US equities, but Anis Lahlou, CIO European equities at Aperture Investors, highlights the potential for European equity innovation to take on markets in 2025. The macroeconomic environment and the health of the monetary market will have a great influence on this, but if the environment is favourable, European equity innovation could be a strong performer through 2025.

Author: Anis Lahlou, CIO European equities at Aperture Investors

Key Takeaways

• With Trump's tariff risk discounted, there is modest upside potential in European equities.
• Europe could find itself in an advantageous position if peace is achieved in Ukraine.
• Sectors focused on AI, robotics and automation could see a surge in investment flows if the currency environment is supportive.
• Europe's most innovative companies are well positioned for a weak economic environment.

European equities are closing another year lagging behind their US counterparts, making them one of the most undervalued asset classes globally. The region's historically slower growth and current concerns over potential tariffs from the United States have contributed to the pessimism, especially given Europe's reliance on exports to the US and China, either directly or indirectly through global trade channels. Yet, beneath these concerns lies an opportunity—Europe's burgeoning innovation sectors (e.g., AI application to manufacturing and services) remain in our view overlooked and undervalued, setting the stage for a potential turnaround.

Many of the allocators we speak to have adopted a structurally underweight position in European equities, questioning whether valuation alone is sufficient to entice them back to the old continent. However, as we look towards 2025, we would like to highlight three important considerations that might shift the narrative.

First, market strategists have already accounted for the potential impact of US tariffs in their forecasts, with expectations of modest EPS growth of around +3-5%, front running the downgrades in the bottom-up STOXX 600 EPS 2025 estimates of +8%. In fact, we believe that the market has already partly priced in tariff impacts; if they are less severe, there could be significant upside potential for European equities.

Second, while geopolitical risks and tariff disputes remain key overhangs, Europe could find itself at an advantage if peace is achieved in Ukraine. Reconstruction efforts would drive demand for regional building, construction, and infrastructure, as well as foster rapid deployment of innovative solutions in construction technologies, automation, and AI-driven project management.

Finally, Europe's challenges could transform into relative opportunities if the ECB adopts a more aggressive monetary easing stance, providing critical support for economic activity and even decoupling from the Federal Reserve's trajectory. Sectors focused on AI, robotics, and automation could see enhanced investment flows, as the supportive monetary environment drives demand for innovation.

In conclusion, while Europe faces significant headwinds in 2025, these very challenges provide fertile ground for innovation and growth. During times of caution and uncertainty, it is essential to recognize the potential of Europe's most innovative companies, as they are well-positioned to thrive when others hold back. We believe the key lies in being prepared to seize these opportunities before the broader market sentiment turns.