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“We don’t feel comfortable in Treasuries anymore. We are going to the bund market,” said Greg Hirt, chief investment officer of multi-asset strategies at the firm. “There will be more issuance in bunds because of German fiscal policy, but that is good because it makes it a more liquid market.”

At the same time, the euro stands to benefit from the economic growth boost after underperforming for the past decade. The currency was headed for its longest stretch of monthly gains in eight years, and JPMorgan Chase & Co. is among firms that see it reaching $1.20 this year, up from $1.04 at the end of 2024.

Mark Nash at Jupiter Asset Management is even more bullish on regional growth. “It wouldn’t surprise me if we hit $1.30 within around six to eight months,” he said, adding that he sees the common currency surging to $1.40 next year, a near 20% jump from current levels.

Meanwhile, low rates and stimulus measures will support corporate earnings, with both the US and Europe estimated to provide 10% to 11% profit growth next year. European stocks trade at a 35% discount to their US peers, making for attractive valuations. European firms pay higher dividends, too, while buyback yields have become comparable.

“While profit growth in Europe may not be as strong as in the US, the valuation gap remains very big,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs Group Inc. “Dividends and buybacks will increase, making the region attractive in total returns.”

Even as US stocks have started to catch up with global peers in June, powered by a renewed appetite for the artificial intelligence trade and reduced tariff fears, something seems to have changed in the way Europe is perceived by asset allocators.

A net 34% of investors are currently overweight euro-area equities, compared with a net 36% underweight US peers, according to the Bank of America fund manager survey published this month. On top of that, over half of asset managers expect international shares to be the top asset class over the next five years, while only 23% picked the US.

There’s also been a drastic change in allocation. European-focused equity funds have attracted $46 billion of fresh money since the start of 2025, on track for the second-largest annual inflows ever, according to BofA citing EPFR Global data. That’s a sharp contrast to last year, when there were $66 billion of outflows.

In the fixed income space, over $42 billion has flowed into European-domiciled funds tracking bonds issued in the common currency, compared to just $5.6 billion for those focused on dollar-dominated notes, also marking a flip from the trend in 2024. Even US companies are borrowing in euros like never before.

And there could be a lot further to go especially for equities after investors, especially foreign ones, piled into the US for years. UBS Group AG analysts expect €1.2 trillion ($1.4 trillion) of capital to rotate from US to European equities in the next five years. They see international ownership of the US equity market retreating to 27% over that period from 30% currently.

“American exceptionalism is touching its limits,” wrote Natixis cross-asset strategists Emilie Tetard and Florent Pochon, adding that both foreign and domestic investors have piled into US equities in recent years.

They expect a normalization in these inflows, citing a declining dollar, rising political risks, AI competition and a narrowing economic growth gap versus the rest of the developed economies. “US investors are to diversify their exposure to international equities, while non-US investors are to reallocate their equity investments toward domestic equity markets.”

To be sure, things might start looking up for the US in the second half. The Fed is expected to start reducing rates by September, which will help bolster the case for Treasuries. Meanwhile, there’s renewed appetite for technology stocks as the AI theme continues to prove supportive for earnings.

The US market is dominated by a club of tech companies worth more than $2.5 trillion like Apple Inc. and Nvidia Corp., seen as key beneficiaries of AI. The European market doesn’t have any real AI plays and there’s not a single public company valued at over $400 billion. The sheer size of the US alone, comprising 70% of the MSCI World Index, means it still automatically gets the bulk of passive inflows.

Even so, the growth prospects due to the changes in European governments’ fiscal policies are enough to keep the bulls optimistic. That’s especially true as the region is a beneficiary of investors reallocating their holdings amid US policy uncertainty.

“Diversification will continue to play out,” Goldman’s Oppenheimer said. “Europe will be quite a compelling story for investors.”

--With assistance from Julien Ponthus, Jan-Patrick Barnert, Sagarika Jaisinghani, Abhinav Ramnarayan, John Viljoen and Anthony Palazzo.

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