Europa tar sällsynt ledning på världens börslistor

In the ranks of the world’s 20 best-performing stock markets this year, every second index is European.

It’s an achievement the region has managed only three times before and is a testament of revived investor confidence in Europe, where growth prospects have finally been improving. It also came as a surprise, as most strategists had predicted the year would bring meager gains while the US economy was set to fuel superior performance on Wall Street.

With a month left of trading for 2025, markets including Hungary, Slovenia and the Czech Republic have rallied more than 60% in dollar terms. That places them among the top 10 best performers globally. Spain, Poland and Austria are close behind, while Germany — one of the region’s biggest markets — has surged 20% in euros and 34% in dollar terms.

As the broader Stoxx 600 Index closes in on its biggest outperformance over the S&P 500 since 2006 in dollars, some investors say the outlook for Europe is only looking up. Inflation remains lower than in America, Germany is about to open the fiscal taps and corporate earnings are projected to rebound. The latest monthly survey by Bank of America Corp. showed investors are now net overweight European stocks, while being slightly underweight US equities.

“At the beginning of the year, people were very reluctant about the rally in Europe, and they got forced into that based on the outperformance,” said Nick Laux, head of international equity trading at Bank of America Corp., adding that there’s scope for the region to outperform further next year.

In a year rocked by President Donald Trump’s trade war, European countries that make most of their money at home such as Italy and Spain have proved to be investors’ favorites. The region’s relatively lower exposure to the artificial intelligence trade has also been a big draw at a time when there are mounting concerns about another US technology bubble.

Overall, 10 of the top 20 markets to have risen the most this year are in Europe, a feat only achieved in 2004, 2015 and 2023 in data going back to the creation of the euro area. While benchmarks in Germany and France are lower on the list at 34 and 53, respectively, they’re still well ahead of the S&P 500, which ranks 63rd in dollar terms among 92 global indexes tracked by Bloomberg.

Part of the outperformance is down to a stronger euro. The currency has rallied 12% against the greenback this year as Germany promised to spend billions on defense and infrastructure, reviving the local economy. German lawmakers are set to approve in the coming days spending €2.9 billion ($3.4 billion) on military procurement contracts, including for drones, rifles and missiles, in deals that will go largely to domestic manufacturers, Bloomberg reported on Friday.

Inflation is also back within a targeted range, allowing the European Central Bank to lower interest rates faster than the Federal Reserve. Meanwhile, the dollar has slumped as Trump’s historic tariffs fueled worries about the end of so-called American exceptionalism.

That’s not to say US stocks have had a bad year. The benchmark S&P 500 is up 16% in 2025, tracking a third straight year of double-digit gains. And while there are some concerns about the tech rally running too hot, investors are broadly confident that the economic outlook remains resilient. Still, European indexes have managed to hold their own even when measured in local currencies, driven by sectors such as banking, defense and renewables.

“Europe is in a very nice place at the moment,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers. “Whenever there are doubts about the US rally, Europe is here to protect you because basically it’s not loaded with tech.”

European banking stocks have been at the forefront of the rally with gains of 67%, and investors are betting they’ll continue to shine on the back of robust earnings, a pick up in M&A activity and the outlook for stable interest rates.

Shares in defense stocks including Rheinmetall AG and Leonardo SpA have also surged in anticipation of higher military spending for years to come, while renewable stocks have jumped on strong demand to power AI infrastructure.

Things are also looking up for the key luxury sector, with heavyweights such as LVMH signaling a rebound in consumer demand after several quarters of malaise. Meanwhile, rising demand for metals in the energy transition and tight supplies have turned Europe’s mining stocks into a “must-hold,” and even the defensive health care sector is starting to attract investors as easing concerns over drug pricing and tariff risks complement tempting valuations.

Analysts expect European earnings growth can finally close the gap with the US after lagging behind since 2023. Stoxx 600 firms are expected to post an 11% jump in profits next year, while S&P 500 earnings are projected to increase by 13% in 2026, according to data compiled by Bloomberg Intelligence.

However, some market participants said optimism about Europe may have gone too far. There’s the threat from lingering political uncertainty in France, questions around the impact of German stimulus and rising competition from China in key industries such as consumer goods and automakers.

“European stocks face a high risk on earnings expectations next year,” said Marina Zavolock, chief European equity strategist at Morgan Stanley. “We think analyst projections are too elevated and there is high potential for downgrades.”

The good news for European stocks is that they remain relatively cheap even after this year’s rally. The Stoxx 600 trades at a 35% discount to the S&P 500 based on forward price to earnings ratios. This means that even a small rise in earnings after near zero growth in 2025 could be enough to carry the market to fresh peaks.

Money flows also suggest investors remain optimistic. European equity funds drew about $52 billion this year, a stark reversal from outflows of $66 billion last year, according to figures from Bank of America, citing EPFR Global.

“In January, there will be some allocation to markets outside the US,” said BofA’s Laux. “But then beyond that it will all depend on the performance. If Europe can demonstrate compelling performance, then the money will come.”

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