6 Factors to Play Europe ETFs Now

Is it time to buy Europe? Wall Street strategists are increasingly igniting this conversation as investors weigh the economic toll of tariffs and a likely flare-up in inflation in the United States. Several major investment banks now believe that European equities are set to outperform their U.S. counterparts by the widest margin in over 20 years, according to a Bloomberg survey of 20 strategists, as quoted on Yahoo Finance.

Among the most bullish forecasts, JPMorgan and Citi forecast European stocks to outpace the United States by the widest margin in decades, as quoted on Yahoo Finance. UBS is also betting big on Europe.

Best-performing Europe ETFs over the past month have been Select STOXX Europe Aerospace & Defense ETF EUAD (up 10.6%), First Trust Europe AlphaDEX Fund FEP (up 7.4%), First Trust STOXX European Select Dividend Index Fund FDD (up 4.9%) and WisdomTree Europe Small Cap Dividend UCITS ETF DFE (up 6.2%). These ETFs topped SPDR S&P 500 ETF Trust SPY (up 5.9%) over the past month, at the time of writing.

What could boost Europe ETFs further?

Cooling Europe Inflation Signals Stability

In May, euro zone inflation unexpectedly fell below the European Central Bank’s (ECB) 2% target to 1.9%. A steep drop in services inflation — from 4% to 3.2% — and a notable decline in core inflation to 2.3% have bolstered confidence in Europe’s economic stability.

This trend reduces pressure on the ECB and supports a more accommodative policy stance, enhancing the region’s investment appeal.Several European central banks have already begun easing interest rates, and so has the ECB.

With inflation cooling more steadily in Europe than in the United States, the chances of lower rates are higher in the euro zone. On the other hand,  the Organisation for Economic Co-operation and Development (OECD) expects U.S. inflation to be closing in on 4% toward the end of 2025.

Interest Rate Cuts on the Horizon

The ECB’s rate cut in April and the high probability of further cuts, potentially as early as this week, signal a pro-growth environment. Lower interest rates typically boost equities, and ETFs tracking European markets could benefit. With the deposit facility rate at 2.25%, down from 4% in mid-2023, the region is becoming more investor-friendly.Investment bank UBS sees monetary policy as a key differentiator.

Falling U.S. Growth Forecast

The Organisation for Economic Co-operation and Development (OECD) on June 3, 2025 downgraded its growth forecasts for both the United States and the global economy. The U.S. growth outlook has been revised to just 1.6% this year and 1.5% in 2026. Tariffs and policy uncertainty have been held responsible for the dampening growth outlook.

China’s Factory Activity Under Pressure

China’s manufacturing activity in May contracted at the fastest pace since September 2022, a private survey showed. Official PMI released over the weekend showed China’s manufacturing activity contracted for a second month in May.

Meanwhile, the HCOB euro zone manufacturing PMI was confirmed at 49.4 in May 2025, rising from 49.0 in April. This marks the slowest rate of contraction in the manufacturing sector since August 2022. Notably, output increased for the third straight month, matching the fastest growth pace seen since March 2022.

Cheaper Valuations Favor European Equities

More attractive valuations in Europe also act as a tailwind. Furthermore, the sector-adjusted P/E ratio in Europe is currently 18% below that of the United States, a gap only seen during recessions or Eurozone crises, or grave conditions not currently in play.

Europe ETFs have been undervalued than U.S. stocks and ETFs. The P/E ratio of the largest Europe ETF Vanguard FTSE Europe ETF VGK stands at 12.26X while its U.S. counterpart — Vanguard S&P 500 ETF VOO — trades at a P/E of 24.72X. Other big Europe ETFs have also been trading at a discount to U.S. ETFs, driving a rally in the former funds this year against an improving economic backdrop.

Earnings Momentum Turning Positive

UBS notes that the relative earnings momentum is now tilting in Europe’s favor, supported by a weaker euro and improving PMIs, which are expected to boost earnings revisions. Importantly, European companies — excluding financials — have healthier and more sustainable profit margins than their U.S. counterparts. 

Bottom Line

As U.S. equities face policy-driven turbulence and China's growth falters, Europe’s relatively steady macroeconomic backdrop and an improving inflation picture are drawing interest.

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This article originally published on Zacks Investment Research (zacks.com).

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