Following last week’s article detailing the performance of the S&P 500 index in 2025, it is worth devoting time to review the developments across the European equity markets in my last article for the year.
European stock markets outperformed most other global equity markets during early 2025 and registered one of their best starts of the year in decades.
On the one hand, German lawmakers initially formally approved a reform of the country’s debt brake rule to enable a rise in public borrowing, and shortly afterwards, they announced an unprecedented fiscal package aimed at bolstering defence and infrastructure spending.
Moreover, investor sentiment towards European equities was also positive as there was a clear path for monetary policy easing by the European Central Bank (ECB), which is an important tailwind for equity investors.
On the other hand, investor confidence towards the US equity market was negatively impacted at the start of the year by the potential consequences of the damaging economic impact of President Donald Trump’s trade tariffs.
Furthermore, in the first few weeks of 2025, the Federal Reserve indicated that it was unlikely to cut interest rates in the first half of the year.
However, the positive momentum across Europe did not last long, as political uncertainty in France, coupled with weak economic data from Germany, and persistent earnings downgrades weighed down the performance of the European equity markets.
During the second half of the year, the European equity markets’ positive performance resumed as inflation data was weaker than expected, supporting further rate cuts by the ECB.
Additionally, the delayed German fiscal stimulus then started and there was also an improved outlook for the Chinese economy, which is important for several European exporters.
The positive momentum across the European equity market was essentially not only the result of the combination of fiscal support, the easing interest rate environment and improved earnings prospects, but was mostly due to what is referred to as “multiple expansion”, namely investors’ willingness to pay a higher earnings multiple.
“The Stoxx 600 banks climbed by almost 60% this year following the 25% gain in 2024”
European stocks entered 2025 trading at discounted levels relative to their US peers, which helped attract capital flows to European equity markets.
While the S&P500 is the most commonly-used index in the US to track equity market performance as opposed to the more concentrated indices, namely the Dow Jones Industrial Average and the Nasdaq, the Euro STOXX 50 index and the STOXX Europe 600 are the popular benchmarks for Europe used by the financial media. While both these indices registered double-digit gains this year, the extent of the upturn in equities across the region can be better appreciated by taking a look at some individual markets.
The equity markets across southern Europe strongly outperformed the larger core markets of Germany and France this year. Spain is clearly one of Europe’s standout performers this year with a surge of over 45% − the largest annual increase in over three decades. The Spanish equity market was supported by improved investor confidence arising from a number of credit rating upgrades.
The Greek stock market also experienced a very strong rally in 2025 of over 43% year-to-date, driven by improving investor confidence and continued evidence of the strong economic turnaround. Italy’s main index, the FTSE MIB, also posted notable double-digit gains during 2025.
One of the main themes that dominated European markets was the surge in banking equities, driven by robust earnings, cost-saving initiatives and improved credit conditions. In fact, this is one of the reasons for the strong performance of European equity indices given banks’ high weighting across most indices. An index of European bank stocks, the Stoxx 600 banks, climbed by almost 60% this year following the 25% gain in 2024.
Bank shares feature among the best performers across most of the indices. In Spain, Banco Santander’s share price rallied by over 120%, while Alpha Bank in Greece saw a similar jump of over 110% as Italy’s UniCredit was building up a stake in this bank as part of its ambitions for cross-border acquisitions. UniCredit’s share price likewise also rallied by over 75% while another Italian bank, Banca Popolare di Sondrio, saw a steeper rise of 89.5%.
Despite the political instability in France, which dampened investor sentiment, the CAC40 still had a positive year. Société Générale’s share price was the strong outperformer as it rallied by over 135%, significantly outperforming BNP Paribas at +33%.
German equities also delivered solid gains during 2025, with bullish investor sentiment across specific economic sectors, namely defence, banking and industrials. Although the German defence company Rheinmetall was the strongest performer at +155%, other very notable upturns were evident in Siemens Energy at +140%, as well as Commerzbank (+120%) and Deutsche Bank (+91%).
Despite the ongoing geopolitical risks as well as further possible trade disruption that could dampen investor sentiment, most analysts expect another positive year for European equity markets given the robustness of the banking sector, the large fiscal stimulus, especially towards defence and infrastructure projects, and the stable interest rate environment.
The next article in this column will be published on January 8, 2026.
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