(Bloomberg) — Europe’s equities have emerged clear winners worldwide as the region’s economic outlook brightens at a time when President Donald Trump’s trade war hobbles US financial markets.
Five months into the year, eight of the world’s 10 best-performing stock markets are in Europe, according to data compiled by Bloomberg. That list features Germany’s DAX Index with a rally of more than 30% in dollar terms, as well as peripheral markets such as Slovenia, Poland, Greece and Hungary.
The pan-European Stoxx 600 Index is beating the S&P 500 by a record 18 percentage points in dollars, powered by Germany’s historic fiscal spending plans and a stronger euro. Market participants say there’s more to come as resilient corporate earnings and attractive valuations make the region a safer bet when concern over trade and fiscal debt grips the US economy.
“Europe is back on the map,” said Frederique Carrier, head of investment strategy for RBC Wealth Management in the British Isles and Asia. “We are getting more questions about Europe now over the last two months than we did over the last 10 years.”
The outperformance, if it lasts, will mark a turnaround from years of sluggishness for European markets. And the rally may just feed on itself: As stocks on the continent rise, they’re likely to attract fresh assets from around the world, equity bulls say.
UBS Group AG analysts said in a recent note that investors’ shift away from US assets will channel €1.2 trillion ($1.4 trillion) into Europe’s stock market over the next five years.
An early impetus for this year’s gains came from the proposal by Berlin — famous for its fiscal austerity — to spend hundreds of billions of euros on infrastructure and defense. Citigroup Inc. economists expect the reform to boost growth across the euro area from the second half of 2026.
On the other side of the Atlantic, investors are on recession watch again amid concerns around inflation and America’s fiscal deficit. Sentiment toward Treasuries took a hit in May after Moody’s Ratings stripped the US of its top credit grade, with bond yields also climbing in response to Trump’s tax-cut proposals.
And in a blow to the president’s trade agenda, a US court has issued a rare rebuke blocking many of the import taxes he has threatened and imposed on key partners. A proposed tax measure is also raising alarm on Wall Street as it would increase tax rates for individuals and companies from countries with “discriminatory” tax policies, potentially driving away foreign investors.
The S&P 500 rebounded in May, but remains a laggard for the year. The index has gained only about 0.5% in 2025 compared with a 12% jump in the MSCI All-Country World Index excluding the US. It also ranks 73rd among the 92 indexes tracked by Bloomberg.
Beata Manthey, head of European and global equity strategy at Citigroup, said the euro area is in “a relatively good place” as the European Central Bank has room to reduce interest rates further, while equity valuations aren’t stretched.
“Of course if there’s a US recession, no market would go unscathed, but the lack of exuberance in Europe makes it more resilient to a deeper selloff,” Manthey said. “Investors had shunned the region for so long that inflows are still tiny compared with outflows of the past few years.”
Peripherals Winning
A slate of Europe’s smaller markets is dominating the leader boards this year. Slovenia’s blue-chip SBI TOP Index is the world’s second-best performing gauge with a rally of 42% in dollar terms, behind Ghana’s benchmark. Poland’s WIG20 Index has gained 40%, while benchmarks in Greece and Hungary are up more than 34% each.
Strategists at Societe Generale SA have recommended peripheral European markets this year, citing a wider risk premium as well as relative political stability. The team continues to predict an outperformance as they expect sovereign bond yields to be more protected than in some of the big spenders such as France and Germany.
Defense stocks have been among the biggest winners this year, with seven of the 10 best-performing stocks in the Stoxx 600 related to the sector. All have surged at least 90%, with German contractors Renk Group AG, Rheinmetall AG and Hensoldt AG leading the pack. Banks and insurance stocks have also outperformed in 2025.
“What’s not to love about European equities?” said Florian Ielpo, head of macro research at Lombard Odier Investment Managers. “In the US you’re punished for taking risk, but in Europe you’re rewarded for it. Inflation looks contained, and there’s finally some visibility. In the US, you’re still wondering what will happen tomorrow, what tweets will you see.”
Earnings Optimism
Corporate earnings have been a bright spot, with first-quarter profits at MSCI Europe companies rising 5.3% compared with expectations of a 1.5% decline, according to data compiled by Bloomberg Intelligence. While many executives tempered their outlooks given lingering trade uncertainties, fewer analysts have cut earnings estimates in the past weeks, suggesting the worst of the downgrades may be over.
To be sure, the global trade outlook remains a key risk. A federal appeals court has offered Trump a temporary reprieve from the ruling threatening to throw out the bulk of his tariff agenda. The president also said he would be increasing levies on steel and aluminum to 50% from 25%.
Many European industries including miners, automakers and luxury goods are heavily exposed to international markets for revenue. Analysts this year have reduced Stoxx 600 earnings estimates for the coming 12 months by about 1.4%, according to data compiled by Bloomberg.
Some market forecasters still bet European stocks will race past their US peers, with the team at JPMorgan Chase & Co. calling for the biggest outperformance on record. On average, a Bloomberg survey of 20 strategists found the Stoxx 600 is expected to gain another 1% from current levels.
“For the first time in a really long time I do believe there’s a chance that European stocks can outperform the US market,” said Francois Rimeu, a strategist at La Francaise Asset Management. “Now for this outperformance trend to hold, earnings will need to show some real growth next year.”
—With assistance from Leonard Kehnscherper, Kwaku Gyasi and Michael Msika.