In the 2025 global stock market competition, a rare reversal is unfolding. The European market, once overlooked by investors, is now dominating the upper ranks of global stock market rankings with impressive performance, breaking the widespread expectation that Wall Street would lead the market.
With just one month left before the close of trading in 2025, Europe accounts for half of the world’s top 20 performing stock markets. Markets such as Hungary, Slovenia, and the Czech Republic have surged over 60% in dollar terms, ranking among the top ten globally. This unexpected robust performance marks only the fourth time since the establishment of the eurozone, signaling a significant return of investor confidence.
This shift is already reflected in capital flows. The latest monthly survey from Bank of America shows that investors have turned to net增持 of European stocks while slightly reducing their holdings in U.S. equities. The Stoxx 600 Index’s dollar-denominated performance relative to the S&P 500 is heading towards its largest advantage since 2006.
Behind the strong rebound lie improvements in Europe’s economic outlook, inflation levels lower than those in the U.S., Germany’s upcoming fiscal stimulus, and a strengthening euro. These factors are collectively reshaping the global capital allocation landscape.
Unexpected Strong Performance
Since the beginning of this year, several European indices have significantly outperformed expectations. Markets like Hungary, Slovenia, and the Czech Republic have risen over 60% in dollar terms, firmly placing them among the best-performing indices globally. Spain, Poland, and Austria’s stock markets have also followed closely. Even Germany, Europe’s largest economy, has seen its index rise by 20% in euro terms and soar by 34% in dollar terms.
By comparison, while the U.S. stock market has also performed well, it has paled in comparison. Among the 92 indices tracked by Bloomberg, the S&P 500 ranks only 63rd in dollar terms, far behind major European markets such as Germany (34th) and France (53rd).
Nick Laux, head of international equity trading at Bank of America, stated: ‘At the beginning of the year, there was much hesitation about Europe’s rally, but based on its superior performance, investors were forced to join in. The region still has room to outperform further next year.’
Multiple Factors Driving the Rebound
The strength of the European market is no accident, supported by multiple underlying factors.
First, the strengthening of the euro has been one of the key drivers. Since the beginning of this year, the euro has appreciated by 12% against the US dollar. This is partly due to Germany’s commitment to inject tens of billions of euros into defense and infrastructure to revitalize its domestic economy. According to a report by Bloomberg last Friday, German lawmakers are set to approve military procurement contracts worth 2.9 billion euros (approximately USD 3.4 billion), primarily involving drones, rifles, and missiles, with most orders going to domestic manufacturers.
Secondly, at the macro level, inflation in Europe has returned to the target range, positioning the European Central Bank (ECB) to potentially cut interest rates faster than the Federal Reserve. Meanwhile, following President Trump’s historic tariff policies, concerns about the so-called end of ‘American exceptionalism’ have continued to weigh on the US dollar, pushing it lower.
Moreover, Europe has also demonstrated advantages in terms of geopolitical dynamics and investment style. Amid Trump’s trade war, countries like Italy and Spain, which derive most of their revenue domestically, have become safe havens for investors. At the same time, as concerns over a potential bubble in US tech stocks grow, Europe’s relatively low exposure to artificial intelligence-related trading has emerged as an attractive feature.
Florian Ielpo, Head of Macro at Swiss Lombard Odier Investment Management, noted: “Whenever doubts arise about the rally in the US, Europe is there to protect you because it is essentially not burdened by excessive tech stock exposure.”
Banks and Defense Lead the Gains
The recent rebound in European equities has been driven by several key sectors.
European bank stocks are leading the way with a 67% surge, as investors bet that robust earnings, rising M&A activity, and a stable interest rate outlook will continue to drive outperformance in the banking sector.
Meanwhile, defense stocks, including Rheinmetall AG and Leonardo SpA, have soared on expectations of increased military spending in the coming years. Renewable energy stocks have also surged significantly due to strong electricity demand driving AI infrastructure development.
The crucial luxury goods industry has shown signs of a turnaround, with industry giant LVMH signaling a rebound in consumer demand after several quarters of sluggish performance. Additionally, rising metal demand driven by the energy transition and tight supply conditions have made European mining stocks a ‘must-hold’ asset. Even the defensive healthcare sector has started to attract investors due to easing concerns over drug pricing and tariff risks, along with attractive valuations.
Earnings and Valuations Remain Attractive
Looking ahead, the appeal of European equities has not diminished despite significant gains.
In terms of earnings, analysts expect that European companies, whose profit growth has lagged behind that of the U.S. since 2023, are finally poised to narrow the gap. According to data compiled by Bloomberg Intelligence, profits of companies in the STOXX 600 Index are projected to grow by 11% next year. By comparison, earnings for companies in the S&P 500 Index are expected to rise by 13% in 2026.
In terms of valuation, even after this year’s rebound, European stocks remain relatively inexpensive. Based on forward price-to-earnings ratios, the STOXX 600 Index is trading at a 35% discount to the S&P 500 Index. This implies that even a modest recovery in earnings, following nearly zero profit growth in 2025, could be sufficient to push the market to new highs.
Potential Risks and Market Divergence
However, not everyone is optimistic about the outlook for the European market. Some market participants believe that the current optimism may be somewhat overstated.
Marina Zavolock, Chief European Equity Strategist at Morgan Stanley, warned: ‘Earnings expectations for European stocks next year are at high risk. We believe analysts’ forecasts are overly optimistic, with a strong likelihood of downward revisions.’
Additionally, the market still faces some potential risks, including lingering political uncertainty in France, the actual impact of Germany’s fiscal stimulus measures, and intensifying competition from China in key sectors such as consumer goods and automobiles.
As Laux of Bank of America put it: ‘In January next year, there will be some allocation of funds to markets outside the U.S. But everything thereafter will depend on performance. If Europe can demonstrate compelling results, then the capital will follow.’
