FOMO sentiment has crossed the Atlantic, and European stocks have now become "hot cakes."

Just a few months ago, there were few reasons to be optimistic about the European stock market. Now, propelled by favorable geopolitical and monetary policy conditions, the European stock market is surging.

Since the beginning of this year, the STOXX Europe 600 Index has risen over 6.8%, far exceeding the S&P 500 Index's increase of 3.37%. In dollar terms, the STOXX Europe 600 Index leads the S&P 500 Index by about 4 percentage points. This is slightly above the historical record set in 2006 and is only the tenth occurrence since the beginning of this century.

As the "FOMO" (fear of missing out) sentiment crosses the Atlantic, investors are re-evaluating this market, which was once considered "uninvestable." Citigroup's calculations show that under the baseline scenario, there is still about 5% upside potential for the European stock market this year.

Marija Veitmane, a senior multi-asset strategist at State Street Global Markets, stated that at the end of last year, the market generally believed in reducing exposure to European stocks, mainly due to the bleak economic outlook for the region.

"But fast forward to now, Europe is leading global stock market performance as it is seen as a cheap refuge from the tech stock sell-off."

Multiple Positive Factors Boost European Stocks

Why is Europe the strongest stock market at the beginning of the year?

Analysts believe that the more attractive valuations of European stocks, improved corporate earnings, and lighter positions have led investors to reconsider this market, which was once deemed "uninvestable." While the European financial sector has gained 18% year-to-date, the return of the seven major U.S. tech companies during the same period was only 9.2%.

Bobby Molavi, head of European equities at Goldman Sachs, pointed out:

"The European banking sector is benefiting from both regulatory easing and a wave of mergers and acquisitions, while U.S. tech stocks are constrained by valuation bubbles and performance pressure."

Data shows that the price-to-book ratio of the European banking sector remains at a historical low of 1.2 times, while the forward price-to-earnings ratio of the Nasdaq 100 Index has reached 28 times.

Additionally, the market believes that the policymakers of the European Central Bank and the Bank of England seem to be becoming increasingly dovish. The German elections are expected to drive the country to adopt more fiscal stimulus measures.

More importantly, the market's hope for a resolution to the Russia-Ukraine conflict in the coming months is growing. A team led by Barclays strategist Emmanuel Cau stated:

"Expectations for a ceasefire have boosted market sentiment towards Europe. While tariff threats may negatively impact the EU stock market, the increasing hopes for a ceasefire offset this effect."

The Risk of Market Overheating Coexists with Potential Opportunities

In the face of the market's fervent sentiment, Citigroup pointed out in its latest strategy report that the underlying logic supporting the excess returns of European stock markets remains solid. The bank's calculations show that, under the baseline scenario, there is still about a 5% upside potential for European stock markets this year.

"Although bearish positions have returned to normal, the market's pricing of earnings expectations has become adequate, and Trump's policies may trigger volatility, the core logic supporting our overweight position in Europe—economic resilience combined with declining interest rates—still holds."

However, the rapid reversal of the European stock market is also leading to some market overheating. Analysis shows that Europe dominates the sentiment dashboard, with some benchmark indices severely overbought within a three-month timeframe.

Marija Veitmane, Senior Multi-Asset Strategist at State Street Global Markets, stated that Europe is leading global stock market performance as it is seen as a cheap refuge from the tech stock slump. But investors should "not celebrate too early":

"The fundamentals in Europe remain very weak, and the increase in market volatility suggests that investors should seek high-quality stocks rather than value stocks."

Goldman Sachs remains relatively cautious about the macro and market outlook for Europe. The Goldman Sachs team stated:

"Uncertainty in Europe remains high in the first quarter, especially regarding U.S. tariff risks."