The Resilient Reality in Eurozone GDP

Has Europe’s sick man finally infected his neighbors? The general consensus is “yes” after eurozone GDP ground to a halt in Q4, flatlining quarter over quarter (a 0.1% annualized growth rate) as Germany and France contracted -0.8% and -0.3% annualized, respectively.^[i] That news broke Thursday, and the ECB responded by meeting consensus expectations for a rate cut. It all gives the impression of a rapidly weakening bloc and a too-little, too-late monetary response, which is the angle most coverage took. Yet we think reality is brighter than this—a signal we think eurozone stocks have been trying to send lately.

At yearend, eurozone stocks were in a seemingly sad place, basically flat since February and flirting with a correction (sharp, sentiment-induced drop of -10% to -20%) from September’s high. Germany and France’s governments had collapsed, S&P Global’s purchasing managers’ indexes showed renewed manufacturing weakness and the entire bloc was tying itself in knots over possible Trump administration tariffs.

But that was then, and backward-looking. Sentiment had soured as the year progressed, and markets spent the fall pricing in that fear. Since then, the tables have turned. Eurozone stocks hit their December lows on December 23. They are up 8.6% in dollars from then.^[ii] And that isn’t just currency swings. In euros, they are just about even with dollar-based returns, at 8.2%.^[iii] They are also far ahead of global stocks (3.0%) and the S&P 500 (1.7%).^[iv] In local currency, eurozone stocks are steadily clocking new highs. In dollars, they are darn close. And these returns include a nice rally Thursday, in the wake of the allegedly disappointing GDP reports and supposedly too-late rate cut.

So what gives? We think stocks spent the autumn doing their day job, pricing in everyone’s fears and the incessantly sour headlines. Legendary investor Ben Graham quipped once that in the short term, stocks act like voting machines, registering investors’ feelings and gut reactions to the latest. But at some point that job completes. The fears get discussed to death and lose their power to influence investment decisions. Nearly anyone inclined to act on them already did. In the lingo, they get priced in, and markets move on to their other main job: weighing the likely reality over the next 3 – 30 months and how that will unfold relative to expectations.

In our view, the GDP reports fit right with this. Yes, headline eurozone growth downshifted. And yes, France and Germany contracted while Italy flatlined. But did you see the news that Spain grew 3.1% annualized, in line with its 2024 trend?^[v] Or that Portugal sped to a holy-cow 6.1% annualized?^[vi] What about Belgium’s 0.8% annualized rise?^[vii] No, because we live in an age of dour European sentiment where the bad gets all the attention and the good slips under the radar.

You could even see this in the discussions of Germany and France. Starting with Germany, headlines trotted out tired tropes about political gridlock blocking pro-growth policies, weighing on economic activity. But the Germany’s Federal Statistical Office reported consumer and government spending rose in Q4, with the GDP decline stemming primarily from exports. That isn’t a new headwind—it ties into the same things that have made German GDP chop sideways for more than two years. Those include global manufacturing’s long hangover from COVID dislocations, China’s struggles and weak electric vehicle sales. All real, but all widely known, and all the same things eurozone and German stocks spent 2024 pricing in.

Same song, second verse in France. There, too, headlines blamed political upheaval for wrecking demand. Yet consumer spending grew 1.6% annualized (unlike Germany, France publishes detailed numbers in its preliminary release).^[viii] Some coverage noted a stall in business investment, and yes, nonfinancial corporate investment fell -0.2% annualized. But did you know this investment decline has now run five straight quarters and that Q4’s decline was the slowest rate of contraction during this span? Seems to us like things are maybe, just maybe, stabilizing. And in any case, if the investment decline long precedes France’s political crisis and revolving door of prime ministers, then it would seem people are overrating the latest alleged threat.

Or, see this another way: The eurozone’s two biggest economies contracted, but the bloc didn’t. Not so very long ago, people would have scoffed at the idea that was possible.

In both cases, we think the underlying data counterbalance the headline weakness—they are good caveats, if you will. And that headlines widely ignored them—just as headlines have ignored eurozone stocks’ rally—tells us sentiment there is gloomy. Too gloomy. So gloomy that things don’t need to go great for stocks to continue getting tailwinds from positive surprise. Just ok would probably suffice. So would not as bad as feared, most likely. And it isn’t about rate cuts, which are really neither here nor there at this point. Not too little too late, just background noise, one tiny variable of many that affect economic activity. Rate hikes didn’t choke growth, so it would be unrealistic to expect a massive rate cut boom. These days, it is more about sentiment, and if rate cuts aren’t making eurozone investors happy, so much the better—more wall of worry.