Can European stock markets continue their rally?

European stock markets have outperformed their US counterparts in the opening months of 2025.

With US stocks and indices having been mainstays among the most popular stocks over recent years, its constituents – particularly the big tech ‘Magnificent Seven’ stocks – have seen their valuations stretched further and further.

Is the correction underway, and could European stock markets displace their US counterparts?“

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The European stock market has been on a strong run, even as recent tariff talks have led to a pullback in some global markets,” said Lale Akoner, global market analyst at eToro.

“As policy uncertainty increases, the most speculative parts of the market (expensive momentum assets) tend to be the first to correct, underscoring the importance of geographic diversification beyond the US.”

As Merryn Somerset Webb recently wrote for MoneyWeek, European stocks are cheap, and with governments looking for ways to unlock funds for increased defence spending, the continent’s productivity could be on the rise.

How long might the rally last, though – and what are the best ways for investors to access Europe’s resurgent stock markets?

What are the main European stock markets?

The largest pan-European stock market is the Euronext exchange, which is based in Amsterdam but has its operational centre in Paris. Euronext covers the Amsterdam, Brussels, Dublin, Lisbon, Milan, Oslo and Paris marketplaces.

The main European stock market indices are the Stoxx indices (Stoxx 50 and Stoxx 600), which track stocks from 17 countries across the Eurozone. There is also the Euronext 100 which tracks the 100 largest and most liquid stocks traded on Euronext.

The national stock markets that are most commonly tracked include Germany’s DAX and France’s CAC. Their major indices are the DAX 40 and CAC-40, which track the forty largest stocks in each respective country.

Then there is the FTSE 100, which tracks the 100 largest UK stocks. It depends largely on context whether or not these would be included among European stocks. Generally, they aren’t associated with European stock markets, but in certain trends such as the recent shift towards defence stocks, it makes sense to consider UK and European stocks alongside one another.

Why are European stock markets outperforming the US?

As Somerset Webb points out, US valuations have been over-stretched for some time, while European stocks have been persistently cheap.

Cheap doesn’t necessarily mean undervalued – for years, they have looked like a value trap – but it does mean there is room for upside, should conditions or productivity improve. Both look like they are.

The ECB cut interest rates on 6 March. Granted, that was partly driven by the economic uncertainty the continent faces in light of the US pulling its military support for Ukraine. However, with that comes the potential for greater European spending on defence.

European companies have upped their game. “The Q4 earnings season exceeded expectations, reviving EPS growth after a period of stagnation,” says Akoner.

“Banks have led the way, with names like Santander, Intesa, and BBVA accounting for the bulk of the upside surprises. The tech sector (ASML, Infineon) has also performed well, though luxury giant LVMH and pharmaceutical leader Sanofi have been notable underperformers.”

Conversely, the overvaluation of US stocks means there is little upside and plenty of downside potential.

The Federal Reserve (Fed) signalled last month that its rate-cutting cycle is done for the time being. While the language around the ECB’s March decision hints that the same could now be true in Europe, it post-dates the Fed’s apparent pause, and leaves Eurozone interest rates substantially lower than those in the US.

Fears of a ‘Trumpcession’ – a self-inflicted recession off the back of the trade war that Trump is intent on waging – create a gloomy outlook for the US economy.

European investors also appear to have soured on the US. The FT cites Morningstar data showing that European-domiciled ETFs investing in US equities experienced $510 million in outflows in the month to 24 February, despite total European ETF flows rising to $35.3 billion.

Europeans aren’t just going off US stocks, but also US products. Trump has previously stated that he might use tariffs to incentivise Europeans to buy more US cars. So far, his administration seems to have had the opposite effect: sales of Tesla cars in Europe have fallen 45%, contributing to Tesla’s share price falling more than 30% so far this year.

Can the European stock market rally last?

The question of course is whether the European stock market rally is a short term response to the economic conditions that have materialised at the start of 2025, or reflective of a longer-lasting trend.

To some extent that will depend on how the macro situation unfolds. It’s far from clear how far Trump is really prepared to push the inflationary risks of his tariffs, and how damaging they might be to Europe in particular.

A peace deal between Russia and Ukraine – whatever the terms – would change the global economic outlook significantly. This would likely be to Europe’s benefit, but it could also reinvigorate US stocks.

As things stand, though, the evidence doesn’t point to Europe’s rally dwindling out. The DAX 40 is making new highs, but as Akoner highlights, 74% of its constituents are trading above their 200-day moving average, compared to 96% at its previous market tops, “suggesting that momentum, while positive, is not extreme”.

However, she adds that a failure to expand profit margins in 2025 could cause the rally to “lose steam”.

Automakers and luxury goods firms stand to lose most from aggressive US tariffs, “while industries like mining and beverages could also see headwinds if trade relations worsen”, says Akoner.

Which European funds can I buy?

There are plenty of ways to access European stock markets, but one way of gaining quick exposure to a broad set of the continent’s market is to buy a fund that tracks European equities.

A broad-based tracker fund for European stocks could be the iShares Core MSCI Europe UCITS ETF (LON:0A3G). This tracks an index of large-, mid- and small-cap European equities.

For a focus on some of the largest European stocks, investors can consider an ETF like the Amundi Stoxx Europe 50 UCITS ETF (LON:0XA5). This tracks the performance of the Stoxx 50 index, providing exposure to the 50 largest stocks in the Eurozone.

Or at the other end of the spectrum, the European Smaller Companies Trust (LON:ESCT) is an investment trust that invests in small- and medium-sized businesses based mainly in Western Europe, excluding the UK. Mostly, it invests in stocks with a market cap between £1 billion and £3 billion.