While trade tensions continue to buffet U.S. markets, Europe’s stock exchanges have taken the global lead, with eight of the world’s 10 top-performing bourses now located on the continent.
Germany’s DAX, in particular, has soared more than 30% in dollar terms so far this year. Investors point to Europe’s robust fiscal plans, stable inflation, and relative political calm as catalysts driving the rally.
The broader Stoxx 600 index has outpaced the S&P 500 by a record 18 percentage points in dollar terms—a remarkable reversal for a region long seen as economically sluggish. Peripheral markets such as Hungary, Slovenia, and Greece are joining core economies in delivering outsized returns.
Behind the surge: Berlin’s once-frugal government has proposed hundreds of billions of euros in spending for infrastructure and defense, a move that is expected to ignite growth across the eurozone by late 2026. Meanwhile, corporate earnings across MSCI Europe rose over 5% in the first quarter—defying expectations of a decline. Analysts at UBS now project $1.4 trillion in global investment could flow into European equities over the next five years.
“Europe is back on the map,” said Frederique Carrier of RBC Wealth Management. “Investor interest is finally returning.”
Tariffs Take Toll on U.S. Markets and Global Trade Confidence
In contrast, U.S. markets have struggled under the weight of President Trump’s renewed tariff push. A federal appeals court recently gave the administration a temporary reprieve, allowing many import taxes to remain—for now. But uncertainty lingers, especially with threats to double steel and aluminum duties to 50%. A proposed tax targeting countries with so-called "discriminatory" policies has also rattled Wall Street, raising concerns among foreign investors.
While the S&P 500 bounced back in May, its gains for the year sit at a modest 0.5%, placing it near the bottom of Bloomberg’s global index rankings. By comparison, the MSCI All-Country World Index, excluding the U.S., is up 12%.
These developments have turned investor sentiment against U.S. assets. Credit downgrades, concerns over fiscal deficits, and inflation pressures are compounding the drag on equities. As a result, safe havens like European defense and banking stocks are drawing renewed interest.
Seven of the top 10 performers in the Stoxx 600 are defense companies, all up at least 90% this year. German arms makers Rheinmetall AG and Hensoldt AG have led the charge, buoyed by government rearmament plans. Banks and insurers have also outperformed as higher rates stabilize margins.
“What’s not to love about European equities?” said Florian Ielpo of Lombard Odier Investment Managers. “In the U.S., you’re punished for taking risk. In Europe, you’re rewarded for it.”
Deal Activity and Valuations Add Momentum
Investor confidence in Europe is also being bolstered by M&A activity and reasonable valuations. Over the weekend, private equity giant KKR increased its offer for Frankfurt-listed Datagroup SE to as much as €58 per share (roughly $66), depending on the final shareholder acceptance level. The deal values the German IT services firm at around €450 million and includes plans for a delisting once finalized in the third quarter.
Datagroup, which employs 3,700 across Germany, expects annual revenue to reach as much as €565 million this year—a roughly 5% increase. KKR’s interest underscores renewed faith in mid-sized European tech firms.
Strategists at Societe Generale are also bullish on so-called peripheral markets. They cite stronger risk premiums and a calmer political backdrop compared to larger spenders like France. The analysts expect continued outperformance, especially as sovereign yields remain well anchored.
Despite this momentum, risks remain. Europe's luxury, auto, and mining sectors are heavily reliant on international trade, and earnings estimates for the Stoxx 600 have been trimmed by 1.4% this year. Yet the broad investor mood remains optimistic—especially as American markets wrestle with their own uncertainties.
At a time when U.S. investors face an unsteady mix of tax hikes, protectionism, and fiscal brinkmanship, Europe’s markets are emerging as the steadier hand. The rally, for now, looks less like a blip—and more like a reshaping of global capital flows.
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