If you’ve been following the stock market this year, you might have noticed something unusual: European stocks are performing better than US stocks. This is surprising because many experts expected the opposite, especially given the new US president’s tough stance on European trade, including fresh tariffs on European goods. But despite these challenges, European stocks have been rising. So, what’s going on?
For years, US stocks have been more expensive than European stocks, meaning investors have been willing to pay more for American companies. Some believed that sooner or later, European stocks would catch up. Now that it’s happening, is this the beginning of a major shift, or just a short-term blip?
One way to understand this is by looking at different sectors of the market. A common belief is that European stock markets have lagged because they contain a lot of “old economy” companies, banks, industrial manufacturers, and mining companies, while the US has been dominated by fast-growing technology stocks. And since technology has been the biggest driver of stock market gains in recent years, the US has outpaced Europe.
But the truth is, even outside of tech, US stocks have performed better in almost every sector over the past decade. Whether you look at healthcare, real estate, or consumer goods, American companies have consistently outperformed their European counterparts.
However, this year, the situation has changed. While European stocks have been doing well, the bigger story is on the US side: the major tech stocks that have led the American market for years, sometimes called the “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Tesla, Meta, and Nvidia), have struggled. Their meteoric growth may have slowed because their future potential is already reflected in their high stock prices.
If these tech giants no longer have room to grow at the same pace, then European stocks may continue to gain ground.
Even though the shift in performance is mostly about US tech slowing down, many large European companies have also had a strong start to 2025. Companies like SAP (software), LVMH (luxury goods), and Deutsche Telekom (telecommunications) have seen their stock prices rise.
Another major trend in European stocks is the rise of defence companies. This is largely because European countries are being pressured to take more responsibility for their own military spending. The US government has indicated that Europe will have to spend more on its own defence rather than relying on American support. Meanwhile, former US President Donald Trump has made it clear that he is less concerned about European security, even negotiating directly with Russia’s Vladimir Putin.
As a result, European defence stocks have surged, while their American counterparts have remained flat or even declined.
This trend isn’t entirely new. Since Russia’s invasion of Ukraine in 2022, European defence companies like Thales, Leonardo, and BAE Systems have already seen increased demand. Many European countries have been ramping up their military budgets, and the latest US policy shift has only reinforced this trend.
As an investor trying to make sense of all this, what are the key takeaways?
European stocks have been catching up to the US not because they are dramatically improving, but because US tech stocks have slowed down.
Defence stocks in Europe could continue to rise as countries boost their military budgets in response to geopolitical uncertainty, while US defence companies might not suffer immediately, but over time, Europe could replace some of its American imports with homegrown alternatives.
Retail stocks in the US are still strong, with companies like Walmart and Costco outperforming their European counterparts.
The current market shift suggests that European stocks could remain strong for a while. If you’re investing, it might be a good time to take a closer look at European markets and defence stocks to see if they fit into your portfolio.
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