For investors rattled by U.S. policy confusion, rising trade barriers and widespread economic uncertainty, an unlikely place of refuge is emerging: European bank stocks. Are they the new gold?
The iShares MSCI Europe Financials ETF EUFN-Q, a U.S.-listed exchange-traded fund that provides one-stop exposure to HSBC Holdings PLC, UBS Group AG and BNP Paribas SA, among dozens of others, has gained about 25 per cent so far this year.
By comparison, the iShares U.S. Financials ETF IYF-A, a fund that includes JPMorgan Chase & Co. and Bank of America Corp., is unchanged.
The divergence is rare, given that U.S. banks have long benefited from the economic strength of their home base, while European banks have been largely stuck with stagnation, bloated balance sheets and inconsistent profits.
The performance numbers over the past decade say it all. The U.S. financials fund gained an average of 11.3 per cent a year, to the end of 2024. That is more than double the gain of just 4.9 per cent a year for European financials.
That’s why this year’s switch to outperformer status, which began in early February, is raising eyebrows.
“Amid a sharp global rotation, the re-rating in European banks year-to-date” – based on rising valuations – “has been unprecedented. Sentiment is probably the most positive we have seen in 20 years,” Andrew Coombs, a bank analyst at Citigroup, said in a note this week.
Many investors have been looking for ways to ride out President Donald Trump’s baffling tariff policies and his refusal to bend to signs of economic stress. Consumer confidence has declined for four straight months, while recessionary risks are rising.
Within the S&P 500, defensive consumer staples and utilities are outperforming tech and consumer discretionary stocks this year, suggesting that investors are growing nervous about the economy.
Gold, which rose above US$3,000 an ounce earlier this month for the first time, has been a popular choice for safety seekers. Cash and government bonds are also alluring.
But rising interest in European banks is something else. It isn’t a defensive sector by any means, but it does reflect upbeat economic prospects on the continent as European leaders respond to Washington’s frosty approach to its allies.
Europe is raising defence spending in light of waning U.S. support. Germany, in particular, is planning to toss aside its self-imposed debt limits and embark upon a spending spree that will include a €500-billion infrastructure fund.
Economists are busily upgrading their European growth forecasts, as U.S. fortunes subside.
The Kiel Institute for the World Economy expects Germany’s gross domestic product will expand by 1.5 per cent in 2026, up from its December forecast of 0.9-per-cent growth. It expects the broader euro region will expand by 1.4 per cent next year.
Granted, that’s not exactly a booming economy. But what’s important here is that the United States may be headed in the opposite direction: Kiel expects U.S. economic growth will deteriorate to 2 per cent this year and 1.7 per cent next year, down from 2.8-per-cent growth in 2024.
The shift in investor sentiment is now having a profound impact on share prices – and could go further. While stocks in the iShares U.S. Financials ETF trade at nearly 2-times book value, stocks in the European financials fund trade at about 1.4-times book value, suggesting that they remain a relative bargain.
But there are risks to consider.
For starters, profits remain a distant promise. Mr. Coombs believes that there is limited upside to corporate profits in the near term. He estimates that just four percentage points of this year’s rally in bank stocks is due to rising earnings estimates.
The rest of the gains are due to soaring valuations, which could easily disappoint investors if sentiment cools off.
As well, any bullish case that rests on some version of European unity could face challenges as member states bicker, for example, over whether to avoid the U.S. and spend the beefed-up defence budget within their home turf.
“Europe needs to figure out all of these pesky details fast as the trade war will require all hands on deck,” Jennifer Lee, senior economist at Bank of Montreal, said in a note.
The rally in European bank stocks has offered a bright spot for investors looking to take advantage of a U.S. policy shift that is threatening to dismantle trading relationships and alliances. Now comes the hard part: Waiting for the banks to reward investor optimism.