Is the "American Exception" making a comeback? European stocks' performance is far inferior to that of American stocks

European companies' second-quarter earnings reports significantly lagged behind their American counterparts, disappointing investors who had previously bet on a recovery in the European stock market.

The second-quarter earnings reports show that the European stock market has once again fallen into stagnation, while the U.S. stock market achieved a 9% profit growth driven by strong performances from tech giants and Wall Street banks.

According to Bank of America, more than half of the constituents of the European Stoxx 600 have reported earnings, and the index may record zero growth, remaining flat compared to the same period last year. In contrast, the average profit growth rate of S&P 500 constituents reached 9%, mainly benefiting from the strong performance of Silicon Valley tech giants and Wall Street banks.

The strong euro and Trump's tariff policies have become a double burden for European export companies. The euro has risen about 12% against the dollar this year, severely impacting European exporters whose revenues are denominated in dollars.

Investors' expectations for the decline of the "American exceptionalism" have fallen short. Franklin Templeton Senior Vice President Grant Bowers stated:

"Earlier this year, the market generally believed that the U.S. would lose its exceptional status and that other regions would catch up. But the reality is that you have to prove this with earnings, profits, and economic growth."

Divergence in Performance Between U.S. and European Stock Markets Intensifies

The performance of European companies during the second-quarter earnings season was lackluster, with only about half of the companies exceeding analysts' expectations. According to Bank of America data, European companies are facing the dilemma of zero profit growth, sharply contrasting with the optimistic expectations investors had at the beginning of the year for a recovery in the region's stock market.

The U.S. stock market, on the other hand, presents a starkly different picture. S&P 500 constituents are expected to achieve a 9% year-on-year profit growth, marking the highest level of exceeding expectations in twenty-five years. Goldman Sachs analysts pointed out that this performance is mainly due to the outstanding results from tech giants and financial institutions.

Bank of America investment strategist Andreas Bruckner stated:

"No one had high expectations for Europe this earnings season. The bar has been set low, but they still couldn't clear it, except for financial stocks."

Automotive Stocks Plummet, Financial Stocks Shine

Although the overall performance is weak, European financial stocks still performed well. Deutsche Bank, UBS Group, and BNP Paribas all exceeded forecasts, mainly due to strong performance in trading activities.

European export companies have become the biggest victims of this earnings season, with automotive manufacturers facing the largest downward revision in 2025 profit forecasts among all industries. Volkswagen, Stellantis, and Mercedes-Benz have all warned about the impact of Trump's tariff policies.

Exchange rate factors have become the main challenge facing European exporters. The euro has risen about 12% against the dollar this year, with investor aversion to U.S. assets pushing up the euro's exchange rate. An analysis of earnings call records by Barclays shows that over 80% of Stoxx 600 companies mentioned that exchange rate fluctuations have put pressure on profits.

Goldman Sachs Senior Equity Strategist Sharon Bell stated:

"The strong euro poses a significant obstacle for European companies, as many of their revenues are denominated in dollars. We believe the euro may continue to rise, and the dollar still appears overvalued." In contrast, the weakening of the dollar has brought unexpected benefits to American exporters, as overseas revenues gain a currency advantage when converted to dollars.

Absence of Tech Stocks Drags Down European Performance

The strong growth of the U.S. stock market has been almost entirely driven by tech stocks, which is precisely the source of momentum lacking in the European market.

Goldman's Sharon Bell pointed out:

"The strong earnings growth of the S&P 500 is almost entirely driven by tech stocks, while Europe has almost none of this dynamic."

The outstanding performance of Silicon Valley tech giants has helped U.S. stocks reach new highs, with the S&P 500 index continuously breaking historical records since early April. In contrast, European stock markets have performed modestly, with the STOXX Europe 600 index yet to return to its peak levels from early March.

Although some sectors, such as aviation, have outperformed their U.S. counterparts this year, the overall recovery momentum of European stock markets is weakening. This marks a return to the norm of "lackluster earnings growth and overall poor performance" in the market