The EU’s latest attempt to outpace US markets has already faltered, and BlackRock stated the reason is clear: the region’s underlying system is still not built for sustained investment leadership.
According to the firm’s latest investment outlook, Europe’s chronic underperformance stems from barriers that hinder companies from scaling, an interventionist regulatory environment and capital markets still being too shallow to compete with the US.
“European equities outperformed the US earlier this year but have since retraced those gains, even though October surveys of business activity reached the highest level since May 2023.”
The firm highlighted slow progress on long-promised reforms (only 11 per cent of the recommendations in former European Central Bank President Mario Draghi’s competitiveness blueprint have been fully implemented) and warned that unlocking growth will require business-friendly policies, a more flexible fiscal framework and a concerted effort to channel Europe’s vast household savings into productive investment.
Against that backdrop, BlackRock has maintained a selective approach to Europe.
The firm identified financials, utilities and healthcare as the most compelling opportunities, with healthcare now preferred over industrials as strong cash flows and rapid AI adoption strengthen the sector’s outlook.
Longer term, it expects defence and industrials to benefit from increased NATO spending commitments, while Europe’s potential strength in AI adoption – even if it lags the US in AI buildout – could drive significant efficiency gains across its manufacturing-heavy economies.
“The US leads on AI buildout, but Europe could take a lead on AI adoption, driving efficiency gains in sectors like manufacturing that comprise a larger share of its economy.”
Still, the firm stopped-short of turning outright bullish on the region. BlackRock remains neutral on European equities overall, arguing that valuations alone will not be enough to close the gap with the US without clearer reform progress.
It stressed that Europe does not need a perfect policy overhaul to regain momentum, instead, it would only require consistent follow-through rather than the crisis-driven reform cycles that have shaped the past decade.
In the meantime, BlackRock sees ample opportunity for active investors to exploit pockets of mispricing and structural dislocation.
Morevoer, the broader market backdrop added further complexity, as US equities have come under pressure amid renewed doubts about the resilience of AI trade.
However, BlackRock believes a cooling labour market and expected Federal Reserve rate cuts should continue to underpin US assets.
According to the CME FedWatch tool, there is now an 80 per cent chance the Fed will cut rates at its next meeting on December 10.
“A softening labour market gives the Fed space to cut, helping ease political tensions from higher interest rates. We think rate cuts amid a notable slowing of activity without recession should support US stocks and the AI theme,” BlackRock said.
Pepperstone’s Chris Weston said a December rate cut would symbolically support the relative ease towards the market’s perceived terminal Fed funds rate near 3 per cent.
“Holding rates steady in December – at a time when the labour market is fragile and both short- and long-term US inflation expectations are falling – would be a disconnect that likely wouldn’t sit well with the market,” he said.
It comes as delayed US economic data is beginning to filter through, however next week is expected to be quiet due to the US Thanksgiving holiday.
The Bureau of Labor Statistics says it will release both the October and November jobs reports on December 16 – after the next Fed meeting.
With Treasury yields holding in a tight range and global economic data still mixed, BlackRock argued that Europe’s trajectory will depend less on cyclical shifts and more on political will.
Until momentum builds, investors may find Europe rich in niche opportunities but still short of a genuine resurgence.
Meanwhile, the S&P 500 fell 2 per cent last week on renewed concerns around the AI theme and stretched valuations, despite Nvidia beating earnings expectations.
“We don’t think rising AI-related debt issuance is a concern. The delayed US jobs report for September, while beating expectations, supports our view that the labour market is cooling and can allow the Federal Reserve to trim policy rates more,” BlackRock said.
“US 10-year Treasury yields dipped but stayed in a rough range between 4.00-4.20 per cent in recent months.”
