Strong Dollar Boosts Overseas Profits”… A Major Turnaround in European Stocks

European stock markets show significant growth, fueled by a strong dollar and high international sales

The European stock market, which had been sluggish for some time, has recently shown a notable shift toward an upward trajectory. This change comes in the wake of the second term of the Donald Trump administration in the United States, which has led to a surge in the value of the US dollar. This has created expectations that European companies with significant overseas revenue will benefit from these currency fluctuations, helping to lift European stock indices.

As of February 8, according to the Wall Street Journal (WSJ), the German DAX index has risen by 9.17% since the beginning of the year. This performance significantly outpaces the rise in the US’s major index, the S&P 500, which has only gained 2.45% so far in 2025. The difference is even more pronounced when compared to the NASDAQ Composite, which has only increased by 1.10%. Other major European indices, such as the UK's FTSE 100 (up by 5.49%) and France’s CAC 40 (up by 7.77%), have also outperformed the US stock market in terms of gains this year. The WSJ pointed out that while Europe’s economy is in a state of stagnation, European stock markets are experiencing a remarkable surge, noting that it is the first time since 2015 that European indices have significantly outpaced US indices at the start of the year.

The primary driving force behind this European stock market rally is undoubtedly the strength of the US dollar. According to the Bank for International Settlements (BIS), the real effective exchange rate of the US dollar stood at 113.49 in December 2024, indicating that the dollar is highly overvalued compared to the benchmark (100 in 2020). This appreciation is largely attributed to the trade policies under the Trump administration, which have contributed to pushing the value of the dollar higher. Additionally, the actions of the European Central Bank (ECB) and the Bank of England, which have been lowering interest rates before the US Federal Reserve, have further affected the exchange rate dynamics.

This favorable exchange rate environment has been particularly beneficial for European companies with high international sales. Many of these companies are expected to benefit from the strong dollar, as their overseas earnings, which are often denominated in dollars, increase in value when converted back into euros or other local currencies. This contrasts with US companies, which are generally wary of the strong dollar due to the impact it can have on their overseas profits.

The Telegraph in the UK has noted that around 75% of the companies listed on the FTSE 100 earn their revenue from overseas, with the majority of this income being in dollars. As a result, the depreciation of the British pound following the US presidential election has been seen as a positive development for British companies, as it boosts their earnings when converted into pounds.

Another factor contributing to the allure of European stocks is their relatively lower price compared to US stocks. Currently, S&P 500 companies are trading at approximately 22 times their expected earnings for the next 12 months. In contrast, German companies are trading at a multiple of 13, while UK companies are trading at around 12. This indicates that European stocks are less expensive, offering potentially greater value for investors.

However, there is some caution regarding the sustainability of this European stock rally. While the current market dynamics are favorable, there are concerns that the Trump administration may target Europe with high tariffs as part of its broader trade strategy. If these tariffs are implemented, it could dampen the positive impact of the strong dollar and lead to uncertainty in European markets.

In conclusion, the European stock market has experienced a significant turnaround, driven by the strong US dollar and the favorable exchange rate dynamics for companies with substantial international revenue. While this trend has been beneficial for European stocks, investors remain cautious, as the future outlook could be influenced by potential changes in US trade policy. The coming months will reveal whether the European market’s growth will continue or face new challenges.