European equities are off to a strong start in 2025. The MSCI EMU (Europe) Index is up 11% year-to-date in local returns, while the S&P 500 is up just 1.4%. You're reading that right: Europe has so far delivered almost 8x the returns of the United States this year.

As shown in figure 1 below, Europe's outperformance is clear when comparing returns to the U.S. market.

Figure 1: Performance, Europe vs. U.S.

As inflation is forecast to hover close to 2%—the target rate of the European Central Bank (ECB)—the ECB cut rates by 25 basis points in January and is expected to continue doing so until the middle of the year.

Depending on how the myriad geopolitical and regulatory issues surrounding the continent play out, the European market could realize a Goldilocks situation where equities are supported by lower rates and controlled inflation.

Last year, we discussed the GRANOLAS basket of 11 European stocks that appeared to hold its own against the Magnificent 7. After months of subsequent underperformance, the GRANOLAS are currently up 2.16% year-to-date, while the Magnificent 7 is down more than 5%. This contrast in returns is illustrated in the following comparison in figure 2.

Figure 2: Returns, GRANOLAS vs. Magnificent 7

What's more impressive is that these companies have managed to deliver outsized returns at much smaller valuation metrics. The price-to-earnings (P/E) ratios of the two groups highlight this valuation gap, as seen in figure 3.

Figure 3: Price-to-Earnings, Magnificent 7 vs. GRANOLAS

European forward earnings growth is closing the gap with that of U.S. equities. At the time of writing, the difference between the MSCI EMU Index's and S&P 500's 2025 forward earnings growth is 5.9%. The difference for 2026 is almost halved at 3.1%. This narrowing gap in forward earnings growth is illustrated in figure 4.

Figure 4: Forward Earnings Growth, S&P 500 vs. MSCI EMU Index

The euro made headlines when it fell to parity with the U.S. dollar in 2022. In 2025, the EUR/USD rate almost hit parity again at the beginning of the year. The historical trend of the EUR/USD exchange rate captures these fluctuations, as displayed in figure 5.

Figure 5: EUR/USD Exchange Rate

It's difficult to say which direction the currency pair will move next, but investors who are seeking exposure to European equities without the effects of foreign exchange fluctuations may want to consider European hedged equity products such as the WisdomTree Europe Hedged Equity Fund (HEDJ) and the WisdomTree Europe Hedged SmallCap Equity Fund (EUSC).

WisdomTree Offerings

HEDJ tracks the WisdomTree Europe Hedged Equity Index, which allocates to dividend-paying eurozone equities with an exporter tilt. The Index neutralizes movements in the EUR/USD exchange rate through currency hedging. The performance comparison of HEDJ to the iShares Currency Hedged MSCI Eurozone ETF (HEZU) in figure 6 highlights how currency-hedged strategies have fared in this environment.

Figure 6: Performance, HEDJ vs. HEZU

The WisdomTree Europe Hedged Equity Index only selects companies that derive at least 50% of their revenues from countries outside of Europe. This exporter tilt was a key driver of year-to-date outperformance relative to the MSCI EMU Index. The Index attribution breakdown in figure 7 below shows what has driven this performance.

Figure 7: Index Attribution

The revenue exposure of these companies further illustrates how much of their business comes from outside Europe, as shown in figure 8.

Figure 8: Revenue Exposures, WisdomTree Europe Hedged Equity Index

With governments enacting policy measures, central banks adjusting interest rates and geopolitical events shaking markets, it's easy to get lost in the noise. But one thing is certain: Success is rented, not owned. And right now, European equities are snapping at the heels of American stocks to draw investors across the pond.

Additional Information

Figure 9: Sector Exposures

Figure 10: Fundamentals

Figure 11: Important Information for Fund Comparison