Europe's Growth Engine Runs Dry

Europe's stock market boom is hiding a darker truth. The continent's growth rate is near 1 percent over the past year, but investors are focusing on global demand rather than domestic growth.

The Stoxx Europe 600 index has risen about 12 percent this year, with companies earning almost half their revenue outside the continent. This is partly good news, as European companies excel in luxury, pharmaceuticals, and engineering.

However, the state of Europe's stock market is not a great proxy for its economy, especially when it comes to local demand. Investors' choices about European equities are often driven by global trends rather than changes within the continent itself.

Past decades have seen corporate Europe's success disguise the bloc's slide toward domestic stagnation. Business leaders and politicians have been able to duck hard choices on how to boost local demand, but pressure for reform is growing due to threats from China and Russia.

European stocks with a domestic focus have beaten globally focused ones by a wide margin since US President Donald Trump announced his tariffs in April last year. The spread between the two has hovered between 10 and 7 percentage points this year, driven by investor pessimism about the EU's global companies being cut off from foreign markets.