The European market has been the surprise packet of 2025, pushing higher as US shares stumbled amid the uncertainty of the Trump administration’s policies. 

The results of a Goldman Sachs Research poll in January highlight the degree to which Europe’s 9% gain  from January 1 to March 24 was unexpected. Only 8% of participants then predicted it would be this year’s best performing global market, instead expecting it to be the worst among developed markets. 

Financial service companies and industrials are standout performers so far, up 18% and 13% respectively. Energy and communications have also done their part in driving the European market’s returns, according to Morningstar. 

“Strong fourth-quarter corporate earnings, higher defense spending, and a lack of direct tariffs targeting Europe from the US appear to have contributed to the surge in stocks from Paris to Frankfurt,” Goldman Sachs analysts recently wrote.

“We’ve been saying for a while that European markets were offering better value than the US or other regions. But up until now the weak macroeconomic situation in Europe has been putting off outside investors. As that improves however, a tipping point has occurred, which has driven investment into Europe, which explains the current rally,” they wrote.

Unsurprisingly, the very top performing stocks year to date have been almost all concentrated in the defence sector.

“With Trump threats and the promise of increased spending by European nations, these stocks have become almost meme stocks, with the likes of Rheinmetall more than doubling in the space of a few months. Names like BAE systems, Thales and Saab have also romped,” says Morningstar’s European-based market strategist Michael Field.

What’s ahead

The question now is whether the rally will continue, or if it’s a one-off bump that will fade relatively quickly.

Goldman Sachs Research, for one, expects European equities to rise as much as 6% from mid-March to the same time next year. A different survey by the Bank of America (BofA) suggests other professional investors hold a similar view.

BofA’s March survey of global fund managers in the week beginning March 10 showed that “long European Union” positions were the second-most crowded trade for the month after “long Magnificent Seven” trades. 
But fund manager Allianz Global Investors (AGI) urges a measured approach to the potential for a continued bull run, even though it acknowledges that European equity markets have “emerged from the doldrums”. 

“The revival in European equities signals some investors may be starting to rotate into the continent’s equity markets from the US, but there’s a long way to go as overall investors remain highly concentrated in US equities,” the AGI team recently wrote.

“We see the potential for European equities to continue to outperform their US counterparts, although conditions may change if the trade war between the two regions were to escalate.”

Potential outperformers

The AGI team identifies several opportunities in Europe in addition to the defence, chemical and construction stocks that would benefit from a peace deal between Russia and Ukraine. These include banks due to robust earnings and the prospect of economic stimulus. It also says the automobile sector is gaining momentum and should receive a further life if the European economy reaccelerates.

Morningstar believes European markets are almost fairly valued now at just 2% below its fair value estimate. 
“But momentum is still behind Europe, inflation continues to fall, GDP growth is picking up, and interest rates are coming down faster than elsewhere in the developed world,” says Field.

“Add to that the recently announced German infrastructure spend package, and the picture still looks bright for the region,” he says.

A handful of ETFs listed in Australia allow advisers to build specific allocations to Europe for clients, with each following a different index.

iShares Europe ETF (ASX: IEU ) tracks the S&P Europe 350 Index and returned 16% in the year to February 28.  

Vanguard’s FTSE Europe Shares ETF (ASX : VEQ) is instead benchmarked to the FTSE Developed Europe All Cap Index and gained 10% in the same period.  Its biggest holdings included multinational software company SAP, Danish pharmaceutical company Novo Nordisk and semiconductor vendor ASML.

Meanwhile, Betashares Europe Currency Hedged  ETF (ASX: HEUR) tracks the S&P Eurozone Exporters Hedged AUD Index and gained 12.88% over the 12-month period.

Europe’s surprise stockmarket gains in 2025 have analysts considering whether its outperformance will continue and whether it’s worthwhile adjusting tactical asset allocations to the region.

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