Performance of European markets in 2025
Over the course of 2025, European stock markets have performed remarkably, clearly outperforming US indices. This resurgence has captured the attention of global investors looking to diversify their portfolios and take advantage of emerging opportunities on the European continent.
European stock indices have seen notable growth this year, with the MSCI Europe Index rising 7%. This rebound contrasts with the 5% drop in the US S&P 500 Index, indicating greater investor confidence in the European market, which has outperformed the US market by 12 percentage points so far this year.
Factors driving European growth
Several elements have contributed to this positive performance:
- Favorable monetary policies: The European Central Bank (ECB) has lowered interest rates, facilitating more flexible financial conditions that stimulate investment and consumption. These measures can be key to revitalizing economic activity in the region.
- Structural reforms and competitiveness policies: Initiatives such as the report presented by Mario Draghi in September 2024 have proposed strategies to improve European competitiveness, including significant investments in innovation and technology. These proposals seek to adapt the European economy to a changing global environment and have generated positive expectations in the markets.
But probably the most relevant factor is related to relative valuations.
More attractive valuations in Europe
Ratings in Europe are clearly lower.
Valuations in Europe and other geographic regions are much more attractive than in the US. This valuation gap may explain the strong performance of European markets, and given the existing differences, this trend is likely to continue as the gaps narrow. According to the chart above, Europe has a valuation discount of nearly 40%.
Investment opportunities in key sectors
Within the European landscape, certain sectors present particularly attractive opportunities:
- Technology and digitalization: The growing adoption of digital technologies and investment in artificial intelligence are boosting productivity and creating new business opportunities in Europe. Companies that lead in technological innovation are well positioned to benefit from this trend.
- Renewable energy and sustainability: Europe’s commitment to the energy transition and sustainability has fostered the growth of companies in the clean energy sector. Projects related to the European Green Deal offer investment opportunities in sustainable infrastructure and green technologies.
- Industry and manufacturing: The revitalization of European industry, supported by investment and modernization policies, has improved the competitiveness of the manufacturing sector. Companies that have adopted innovative and sustainable processes are seeing growth in their market value.
These are opportunities, but it remains to be seen whether they will actually materialize.
European rearmament as a driver of investment
An additional factor that could boost economic growth in Europe is the significant increase in defense spending. The new geopolitical situation, marked by the war in Ukraine and the growing perception of risk on the eastern flank of the European Union, has led many countries to rethink their strategic priorities. Germany, for example, has approved an extraordinary fund of €100 billion to modernize its armed forces. But beyond national decisions, the European Commission itself has expressed its willingness to mobilize up to €800 billion in investments aimed at strengthening the common defense. This collective effort not only strengthens the continent’s security but can also act as an economic catalyst in key sectors such as the arms industry, technology, advanced engineering, communications systems, and cybersecurity.
Although this investment is motivated by the need to ensure stability, it also represents an opportunity for the European industrial fabric. Some of our clients have asked us for an advanced portfolio (customized) dedicated to this sector.
Considerations for investors
The advantage of indexing and diversification is that you don’t have to guess which sector or macro geographic region will do best.
While the European landscape presents attractive opportunities, it is essential for investors to maintain a well-diversified strategy. Factors such as geopolitical tensions, international trade policies, and monetary policy shifts can influence market volatility. Our approach focuses on creating diversified portfolios across different asset classes with a global view tailored to individual objectives. An overweighting of European markets in our euro portfolios, above their actual weight in global indices, could prove beneficial in the current environment.
