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This year’s dazzling ascent in US stocks and the alarming churn of the country’s presidential policy positions are obscuring one of the clearest and most important market shifts of 2025: the rest of the world is kicking America’s butt.
Fund managers are generally thoughtful, intelligent types but the truth is that they (and journalists, to be fair) can think about only one big theme at a time. Two at a push. Beyond that, really significant shifts in market dynamics can struggle to poke through. This year, one of the biggest stories struggling for sunlight is the spectacular breakout in European stocks.
Top of the pile is Spain’s Ibex index, up by a little over 40 per cent this year — the biggest jump in more than three decades — to a record high. In Italy, stocks have climbed by more than 26 per cent. France has put in a relatively paltry 10 per cent ascent.
But here’s the thing: The drop in the dollar at the start of this year makes this even more dramatic. An unhedged US dollar-based investor who had been in France’s Cac 40 would have made 23 per cent in gains — streets ahead of the 17 per cent in the US’s S&P 500 benchmark. A dollar-based investor in Spain has clocked up a rise of nearly 60 per cent. By contrast, a euro-based investor has seen returns from the S&P of just 4 per cent.
Do you see Eurocrats beating their chests on financial TV shouting about how Europe is home to some of the most exciting markets in the world? Not one bit. Instead, they lament the lack of reforms and progress towards a truly united capital market. And they fret about the relative lack of economic growth. They are right to do all of that but a little Make Europe Great Again hubris on top would not go amiss.
With no small irony, the people most willing to beat up Europe, and doubt its ability to deliver change, are Europeans. “I cannot tell you how ingrained this is,” said Karen Ward, chief market strategist for Europe at JPMorgan Asset Management. Optimism about economic growth in Europe is close to impossible to find, and heaven knows we have had multiple false dawns. But as Ward points out, Germany is about to embark on spending an amount equivalent to 12 per cent of its annual economic output on defence and infrastructure projects. It is very hard to see how that does not translate into a brighter environment for growth in Germany and around the continent.
Economists at French bank BNP Paribas say their positive view on European growth is one of its more out-of-consensus calls for 2026, and doubts about Germany’s ability to spend its money quickly, with the desired trickle-down effect to the rest of the economy, are the main pushback they receive to that view. “We maintain the stance that [Europe] will surprise to the upside” next year, said Luigi Speranza, chief economist at the bank, in a presentation this week. “The conviction on our side is that the fiscal stimulus will be more effective than people assume.”
The fiscal austerity that held back Europe, particularly in comparison with the US, in the aftermath of the great financial crisis, is a thing of the past. Now, its banks are in great shape (the Stoxx 600 banks index is up nearly 60 per cent this year) and its governments are spending. Not even perpetual political dysfunction in France is able to hold the markets back. The reasons for optimism keep racking up.
The jump in stocks this year has come with an unusually speculative flavour. Willem Sels, global chief investment officer at HSBC Private Bank, points out that the ascent in US stocks is “healthier”, in the sense that it has drawn strength from corporate earnings. In Europe, by comparison, gains have come from multiple expansion — investors’ willingness to pay more for essentially the same thing.
You can read that in one of two ways: One is “go, Europe!” — a little drop of speculative excitement goes a long way in relatively small markets, and price-to-earnings ratios have a long way to catch up with the US. The other is to be more cynical, see this year’s blowout European performance as a flash in the pan, and keep putting capital into the earnings-generating machine that is the US tech miracle.
Asset managers tell me that what happens in Europe stays in Europe. US investors have barely even registered what is going on there or, for that matter, in Asia, which can also boast some spectacular gains in 2025.
“There was a brief period of optimism about Europe,” said Sels — particularly around the time that Germany announced its huge fiscal expansion in the spring of this year, much of which has been slow to get moving. Interest from his clients in Europe remains relatively weak, he said, whereas the US still has a star quality that engenders Fomo — the fear of missing out.
For investors inside the US as well as out, bulking up on stocks in the rest of the big wide world makes a lot of sense, in terms of market performance but also in terms of avoiding the risk of further dollar declines. What Europe needs now is a bit of Mega Fomo.
katie.martin@ft.com
