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3471For years, Wall Street was the place to be. Tech giants soared, the economy seemed unstoppable, and investors didn’t look much beyond U.S. borders. But in 2025, that tide is turning—fast.
In a historic move, European stocks have pulled far ahead of their U.S. counterparts. The pan-European Stoxx 600 outperformed the S&P 500 by nearly 17 percentage points this quarter in dollar terms. That’s the biggest gap on record.
Why Europe Now?
One of the main reasons investors are looking to Europe is simple: value. After years of underperformance, European equities have been considered cheap. That, paired with strong policy shifts—especially from Germany—has created what many are calling a rare opportunity.
“We have been waiting for a long time for this sentiment to change,” Daniel Nicholas of Harris Associates told Bloomberg. “European companies have been mispriced.”
Germany’s plans to ramp up defense and infrastructure spending have played a major role. Investors who were underweight on the region are now rushing in. Bank of America’s latest survey found fund managers are the most overweight in Europe they’ve been in almost four years.
More than $21 billion has flowed into European stock funds this year through mid-March, according to EPFR Global. Germany is seeing the bulk of that money, with its DAX Index up 13% this quarter.
“The rally can go on for a bit. On a three-to-six month basis, Europe is attractive,” Jean Boivin at the BlackRock Investment Institute told Bloomberg.
Currency and Sector Tailwinds
The euro is gaining ground, too. It was near parity with the dollar in February but jumped close to $1.10 in March. Ales Koutny at Vanguard International says hitting $1.20 by year-end is a “very real probability,” depending on how Trump’s tariff plans unfold.
The defense sector has been one of the biggest winners. Goldman Sachs reports its basket of European defense stocks is up 70% this year, with investors betting big on companies like Rheinmetall AG.
There’s also growing interest in firms tied to infrastructure and rebuilding projects, especially with long-term plans for Ukraine. Sectors like materials, industrials and utilities are gaining traction.
It’s Not All Smooth Sailing
Despite the rally, not all European sectors are riding the wave. Automakers and healthcare stocks are lagging. And while construction and materials stocks have jumped, some say the gains may not last.
“From my conversation with managers in the sector, it is quite unlikely that the Ukraine reconstruction effort, when it comes underway, will translate into meaningful earnings,” said Ariane Hayate of Edmond de Rothschild Asset Management.
Still, optimism is hard to ignore. Nearly half of strategists in a Bloomberg survey have raised their forecasts for the Stoxx 600 since February.
“In more than 30 years in markets, I have rarely seen such a sudden surge in Euro-optimism,” said Holger Schmieding, chief economist at Berenberg. “Is the Europhoria justified? My answer is nuanced. Yes and yes – but not in every respect.”
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