July 16, 2025
As the S&P 500 consolidates new highs and positive expectations ramp on global trade resolution we’ve seen ex-US equities in aggregate struggle to keep pace with domestic equities. In our last WWW column we talked about the idea that ex-US equities are likely to remain a haven trade. We also, outlined areas of current strength in EAFE banking stocks and Heavy Industry. It’s the former of those areas of strength we want to focus on today as the Euro banking sector is showing a very long-term technical bullish reversal at a broad level. This is potentially a secular reflation with more upside despite robust performance over the past 12-months.
We think European Financials are in a secular reflation that relates back to the Global Financial Crisis (GFC) of 2008/09. For those market participants above a certain age, the change in the way people viewed and invested in banking stocks changed dramatically after that bear market. Tight lending standards, higher reserve requirements, mark-to-market accounting rules, tax burdens and increased regulatory burdens were the banking narrative for years. But while US banking stocks ran into fresh turbulence in 2023 with the run on super-regional banks like SIVB and SBNY, European banks have found a reprieve from structural pessimism and have begun to reflate in earnest. EM Financials have also shown some strength, but the reflation dynamic relative to Europe’s big banks is widespread and obvious.
Euro Financials Long-term Reflation
The iShares MSCI Europe Financials ETF reflects this dynamic (chart below). The ETF has outperformed the S&P 500 by >26% over the past 12-months. The ETF has lagged US equities since market lows on April 7, 2025, however it has held on to a majority of gains despite a steady bullish advance from US stocks.
Strength in banking stocks has spanned Europe (charts below). We are showing long-term charts of major banks across Italy, UK, Spain, and France. There are many more we examples we could show and many other countries we could include with a similar long-term bear-to-bull dynamic. We think this reflation trend in Euro banks has potential to continue outperforming over the longer-term relative to ex-US stocks and act as a key component of the defensive haven rotation when “risk-off” sentiment prevails.
HSBC
BBVA
BNP
ISP
Conclusion
The US bull market remains the strongest trend in equities. However with the S&P 500 at all-time highs and approaching overbought conditions in July, we need to keep in mind both offensive and defensive leadership dynamics. We think European Financial exposures like EUFN offer potential to outperform under a variety of scenarios as the overhang of pessimism around ex-US Financials from the GFC dissipates. The charts hint at more upside despite strong gains over the past 12-months.
Data sourced from FactSet Research Systems Inc.
