Rare major reversal! The global bull market ranking is surprisingly dominated by Europe

In the competition of global stock markets in 2025, a rare reversal is taking place. The European market, which was once overlooked by investors, is now dominating the global stock market rankings with astonishing performance, breaking the common expectation that Wall Street would lead the market.

With only one month left until the end of trading in 2025, Europe accounts for half of the top 20 best-performing stock markets globally. Markets such as Hungary, Slovenia, and the Czech Republic have all seen increases of over 60% in dollar terms, ranking among the top ten in the world. This unexpectedly strong performance marks only the fourth time since the establishment of the Eurozone, indicating a significant return of investor confidence.

This shift has been reflected in the flow of funds. Bank of America's latest monthly survey shows that investors have now turned to net buying of European stocks while slightly reducing their holdings in U.S. stocks. The performance of the Stoxx 600 Index relative to the S&P 500 in dollar terms is heading towards its largest advantage since 2006.

Behind the strong rebound is the improvement in Europe's economic outlook, inflation levels lower than those in the U.S., upcoming fiscal stimulus in Germany, and a strengthening euro. These factors are collectively reshaping the allocation of global capital.

Unexpected Strong Performance

Since the beginning of this year, the performance of several European indices has far exceeded expectations. Markets such as Hungary, Slovenia, and the Czech Republic have all seen increases of over 60% in dollar terms, firmly placing them among the best-performing indices globally. The stock markets of Spain, Poland, and Austria are also following closely behind. Even Germany, the largest economy in Europe, has seen its index rise by 20% in euro terms and soar by 34% in dollar terms.

In contrast, while the U.S. stock market has also performed well, it has lost its luster. Among the 92 global indices tracked by Bloomberg, the S&P 500 ranks only 63rd in dollar terms, far below major European markets like Germany (34th) and France (53rd).

Nick Laux, head of international equity trading at Bank of America, stated: “At the beginning of the year, people were very hesitant about the rise in Europe, but based on its excellent performance, they were forced to join in. The region still has room to outperform next year.”

Multiple Positive Factors Boosting the Rebound

The strength of the European market is not coincidental; it is supported by multiple factors.

First, the strengthening euro is one of the key driving forces. This year, the euro has risen by 12% against the dollar. This is partly due to Germany's commitment to invest billions in defense and infrastructure to revitalize its economy. According to Bloomberg, German lawmakers are set to approve a €2.9 billion (approximately $3.4 billion) military procurement contract, primarily involving drones, rifles, and missiles, with orders mainly directed to domestic manufacturers.

Second, on a macro level, inflation in Europe has returned to the target range, which allows the European Central Bank (ECB) to potentially cut interest rates faster than the Federal Reserve. Meanwhile, following President Trump's historic tariff policies that raised concerns about the end of the so-called "American exceptionalism," the dollar has continued to weaken In addition, Europe also shows advantages in geopolitical and investment styles. Against the backdrop of the Trump trade war, countries like Italy and Spain, which primarily rely on domestic income, have become safe havens for investors. At the same time, as concerns about the bubble in U.S. tech stocks grow, Europe's relatively low exposure to artificial intelligence trades has also become a major attraction.

Florian Ielpo, the macro head of Lombard Odier Investment Managers, pointed out: "Whenever people start to doubt the U.S. rally, Europe is there to protect you because it basically has no excessive burden of tech stocks."

Banking and Defense Sectors Lead the Way

The current rebound in European stock markets is led by several key sectors.

European bank stocks are in the lead with a 67% increase, as investors bet that robust earnings, a rise in merger and acquisition activities, and a stable interest rate outlook will continue to shine for bank stocks.

Meanwhile, with market expectations of increased military spending in the coming years, defense stocks, including Rheinmetall AG and Leonardo SpA, have seen their prices soar. Renewable energy stocks have also surged due to strong electricity demand driving AI infrastructure.

The key luxury goods sector has also seen a turnaround, with industry giant LVMH signaling a rebound in consumer demand after several quarters of sluggishness. Additionally, the rising demand for metals and supply tightness brought about by energy transition have made European mining stocks a "must-hold" asset; even the defensive healthcare sector has begun to attract investors due to eased concerns over drug pricing and tariff risks, along with appealing valuations.

Earnings and Valuations Remain Attractive

Looking ahead, the attractiveness of European stock markets has not faded despite the significant rise.

In terms of earnings, analysts expect that after trailing behind U.S. companies since 2023, European corporate earnings growth is finally set to narrow the gap. According to data compiled by Bloomberg Industry Research, profits for constituents of the Stoxx 600 index are expected to grow by 11% next year. In comparison, profits for constituents of the S&P 500 index are projected to grow by 13% by 2026.

From a valuation perspective, even after this year's rebound, European stocks remain relatively cheap. Based on expected price-to-earnings ratios, the valuation of the Stoxx 600 index is at a 35% discount to the S&P 500 index. This means that after nearly zero growth in earnings in 2025, even a slight rebound in profits would be enough to push the market to new highs.

Potential Risks and Market Divergence

However, not everyone is optimistic about the prospects for the European market. Some market participants believe that the market's optimism may be somewhat excessive.

Morgan Stanley's Chief European Equity Strategist, Marina Zavolock, warned: "The earnings expectations for European stocks next year face high risks. We believe analysts' forecasts are overly optimistic, with a high likelihood of downward revisions."

Additionally, the market still faces some potential risks, including France's persistent political uncertainty, the actual impact of Germany's fiscal stimulus measures, and China's increasing competition in key industries such as consumer goods and automobiles As Laux from Bank of America said, "In January next year, some funds will be allocated to markets outside the United States. But everything thereafter will depend on performance. If Europe can demonstrate convincing performance, then the funds will follow."