As we approach year-end, the investment landscape has delivered one of its most surprising developments in recent memory. For the first time since 2023, European equity markets are demonstrating remarkable strength relative to their global peers—a shift that few analysts anticipated at the start of the year.
The numbers tell a compelling story: half of the world’s twenty best-performing stock markets in 2025 are European. This level of regional dominance has occurred only three times since the euro’s creation, making it a genuinely rare phenomenon worth examining closely.
Small Markets, Outsized Returns
While household names like Germany and France have posted solid gains, some of Europe’s smaller markets have delivered truly exceptional performance. Hungary, Slovenia, and the Czech Republic have each surged more than 60% when measured in U.S. dollar terms, placing them among the top ten performers globally. Spain, Poland, and Austria aren’t far behind, while Germany itself has climbed 34% in dollar terms—a figure that significantly outpaces what most forecasters predicted.
To put this in perspective, the broad-based Stoxx 600 Index is approaching its largest outperformance versus the S&P 500 since 2006 when measured in dollars. This isn’t just a matter of one or two sectors driving returns; it represents a broad-based resurgence across multiple European economies.
What’s Driving the European Renaissance?
Several fundamental factors have converged to support European equities:
Inflation dynamics have favored Europe, where price pressures have moderated more significantly than in the United States. This has provided central banks with greater flexibility and supported consumer spending power.
Fiscal policy shifts represent perhaps the most dramatic change. Germany, historically cautious about government spending, has committed to substantial investments in defense and infrastructure. Lawmakers are poised to approve nearly €3 billion in military procurement—funds that will largely flow to domestic manufacturers, stimulating the local economy.
Trade war insulation has worked in Europe’s favor. Countries with economies oriented toward domestic consumption, such as Italy and Spain, have proven more resilient during periods of elevated trade tensions. Their reduced exposure to cross-border tariff disputes has been a distinct advantage.
Technology sector positioning has also played a role. While U.S. markets have seen extraordinary gains from artificial intelligence-related stocks, some investors have grown concerned about valuation excesses. Europe’s more modest exposure to this theme has actually attracted capital from those seeking to diversify away from concentrated tech positions.
The Currency Factor
An important component of these dollar-denominated returns stems from euro strength. The shared currency has appreciated 12% against the dollar this year, amplifying gains for U.S.-based investors holding European positions. Germany’s fiscal stimulus commitments have been a primary catalyst for this currency movement.
Earnings Expectations and Valuations
Looking ahead, analysts project that European corporate earnings can finally narrow the growth gap with their American counterparts. Stoxx 600 companies are expected to post approximately 11% profit growth in 2026, compared to 13% for S&P 500 constituents. After several years of lagging earnings, this convergence would represent meaningful progress.
Perhaps most intriguingly, European stocks remain attractively valued despite this year’s strong performance. The Stoxx 600 trades at roughly a 35% discount to the S&P 500 on a forward price-to-earnings basis. This valuation gap suggests that even modest earnings improvement could support further gains.
Putting U.S. Performance in Context
None of this suggests American markets have faltered. The S&P 500 has delivered approximately 16% returns in 2025—its third consecutive year of double-digit gains. The U.S. economy has proven resilient, and many investors maintain confidence in the domestic growth outlook.
However, the relative outperformance of European indices—even when measured in local currencies—indicates genuine fundamental improvement rather than merely favorable currency translation. Banking, defense, and renewable energy sectors have been particular standouts.
What This Means for Portfolios
For investors, this European resurgence offers several considerations:
Geographic diversification has reasserted its value. The concentration of returns in U.S. technology stocks over recent years had led some to question whether international exposure remained worthwhile. This year’s performance demonstrates why maintaining global diversification continues to make sense.
Valuation opportunities may exist in markets that have been overlooked. European equities’ discount to U.S. stocks, combined with improving fundamentals, creates a potentially attractive risk-reward profile.
Currency effects can significantly impact international returns. The euro’s strength has been a tailwind this year, though currency movements can work in either direction and should be considered when evaluating international positions.
Looking Forward
Whether European markets can sustain this year’s momentum into 2026 will hinge on several variables: Germany’s fiscal expansion, corporate earnings strength, shifting U.S.–Europe trade dynamics, and the relative pace of global economic growth. What’s unmistakable, however, is the broader lesson 2025 has delivered: market leadership rotates, often in ways even seasoned investors don’t anticipate.
At West Advisory Group, we’ve spent decades watching these rotations play out across countless market cycles. And while we know we can’t control the headlines, elections, foreign markets, or global policy shifts, we can control how our clients are prepared for them. That’s why we developed our signature PEAK FORMula, a planning process built specifically to guide retirees and near-retirees through the ebbs and flows of real retirement life, not just textbook theory.
For those within five years of retirement, the transition from accumulation to distribution is one of the most consequential financial shifts of their lives. Our team of experts is uniquely equipped to help navigate that transition with clarity and confidence, ensuring that global surprises, like Europe’s unexpected strength this year, are accounted for within a disciplined, diversified, long-term strategy.
This year has rewarded investors who maintained international exposure. For others, improved fundamentals and compelling valuations abroad may signal it’s time to revisit whether global diversification deserves a place in their retirement plan. Through the PEAK FORMula, we help clients evaluate these kinds of opportunities within the context of their personal goals, risk tolerance, and long-term needs.
If there’s one constant in investing, it’s that markets will continue to surprise us. But with a thoughtful process, the right guidance, and a plan built to withstand uncertainty, you can stay ready for whatever comes next.
