Europe has been the standout place to invest in 2025, with the Eurostoxx index of the largest companies up some 21.7% so far this year.
This dominance has shot the Continental market to the top of the charts, with the second-place FTSE 100 (16%) and third-place MSCI Emerging Markets (10.6%) some way behind among major indices.
However, investors should note that this is not a short-term trend. Julian McManus, portfolio manager at Janus Henderson, said Europe has been ahead of the S&P 500 in multiple months since 2022, as the below chart shows.
Source: Janus Henderson
“A number of reasons help explain this turn in performance: the weakening of the US dollar; a resurgence in fiscal and defence spending measures by European governments; historically low valuations; eight cuts to the EU’s benchmark rate since June 2024; and growing prospects for deregulation of the continent’s banking system, which could unlock capital for private investment,” he said.
All of this points to the idea that Europe could be in-line for a sustained period of outperformance.
So what’s driving it?
Alongside the factors mentioned above, Europe is home to large defence companies, which have thrived in a world where the outbreak of war and the need for governments to invest in military spending has significantly increased.
Banks, which also dominate on the Continent, have shone in an era of rising interest rates. Although these have come down, they remain far above their pre-Covid levels, allowing financial institutions to make more money than they have for the decade following the financial crisis.
However, looking at the comparison between the US and European markets over the past five years, it appears as though Europe tends to outperform when American companies fall. They either hold up better (such as at the start of this year) or are able to make gains when the US market is flat or moderately down.
When US equities rebound (such as in the past few months) they are unable to keep pace with the swathe of cash that flies into companies such as the ‘Magnificent Seven’ when sentiment improves.
The headwinds
Although 2025 has been a booming year so far for Europe, investors should note that this is only the third year in the past 10 that European stocks have beaten their US rivals.
Risks to Europe remain. Trade policy impacts the bloc more than other parts of the world as it is heavily reliant on exports – not ideal in a world where globalisation is being dismissed in favour of more nationalistic tendencies.
Additionally, political turmoil inside the European Union, headlined this week by the no confidence vote called for in France, shows there are many potential pitfalls for the region.
So what should investors do?
Despite this, the evidence remains clear that European companies are enjoying their moment in the sun and are currently the place to be for those who want to diversify away from the US.
As McManus said: “Though plenty of downside risks exist, there’s also reason to believe the asset class is just getting going.”
While transferring everything into Europe may be a bit of an overreach, diversifying away from the US should be a strong consideration right now, given the risks that abound in America.
For those considering Europe, passive funds dominate the top of the IA Europe Excluding UK sector, with iShares EURO Dividend UCITS ETF making a 39.4% gain so far in 2025 – the best in the peer group.
Seven of the top 10 funds are trackers, although they are a mix of dividend, mid-cap and value strategies – rather than a generic all-market tracker.
For active enthusiasts, Artemis SmartGARP European Equity (38.4%) sits in second place in the sector, while WS Ardtur Continental European and HSBC GIF Euroland Value are also among the top 10.