European Stocks: Examining Performance Trends for H2 2025

European equities experienced a remarkable surge in the first half of 2025, significantly outpacing their U.S. counterparts. As of June 29, 2025, the pan-European Stoxx 600 index recorded a gain of 7%, with Germany's DAX soaring 20%, Italy's FTSE MIB up 16%, Spain's IBEX 35 rising approximately 20%, and the FTSE 100 increasing by 7.7%. In contrast, major U.S. indices such as the S&P 500 and Nasdaq Composite only managed a 5% increase, while the Dow Jones Industrial Average rose by a mere 3%.

Historically, such strong performances in the first half of the year are rare for European stocks, having occurred only 16 times since 1987. According to CNBC's analysis, averages suggest that following a first half rally exceeding 6.6%, European stocks typically return only 4.1% in the second half. However, on occasions when stocks continued to rise, returns reached as much as 11%. Conversely, on the five occasions where stocks declined, they fell by around 9%.

Looking forward, analysts remain cautiously optimistic. Goldman Sachs Asset Management (GSAM) in its mid-year outlook highlighted that the bull market in Europe is fueled not just by concerns over U.S. market dynamics but also by emerging investment opportunities across various sectors. According to GSAM analysts, "Europe looks appealing, and many investment opportunities are emerging across sectors in the region." They specifically noted that structural fiscal reforms in Germany, alongside increased defense spending commitments from NATO members, are creating favorable conditions for investments in defense, energy, and infrastructure sectors.

Frédérique Carrier, head of investment strategy at RBC Wealth Management, echoed these insights, suggesting that substantial changes within Europe could lead to lasting economic shifts. In her report, she stated that the MSCI EMU Index trades at a forward price-to-earnings ratio of 15.4x, which is consistent with its long-term average and favorable compared to U.S. equities, even when adjusted for sectoral differences. Carrier emphasized the potential for growth in specific sectors likely to benefit from new fiscal stimulus, particularly in defense and industrials.

However, not all analysts share this optimistic outlook. Julius Bendikas, European head of economics at Mercer, cautioned against excessive optimism, suggesting that the economic landscape over the next six months may be influenced by ongoing tariff impacts and cooling labor markets. Bendikas advised a neutral stance towards European equities and recommended focusing on fixed income investments, particularly U.K. government bonds, instead of equities.

Further skepticism came from strategists at Bank of America, who acknowledged the improving growth narrative within the euro area but expressed doubts about significant upside for European equities this year. In a recent client note, they projected a potential 10% downside risk for the Stoxx 600, attributing this to anticipated global growth slowdowns due to tariff pressures, which could elevate equity risk premia and reduce earnings.

In summary, European stocks have made a remarkable comeback in the first half of 2025, driven by a combination of favorable fiscal reforms and sector-specific opportunities. Yet, the outlook for the second half remains mixed, with a blend of cautious optimism and bearish sentiment from various analysts. The potential for continued growth exists, but investors will need to navigate a landscape marked by economic uncertainties and evolving market dynamics.