European shares surged in the first half of the year, massively outperforming stocks on Wall Street — but market watchers are divided on the potential for the trend to continue. As of Friday’s close, the pan-European Stoxx 600 index has gained 7% so far this year. Germany’s DAX index has surged 20% year-to-date, while the FTSE 100 is up 7.7%, Italy’s FTSE MIB has gained 16%, and Spain’s IBEX 35 has risen around 20%. That marks a major outperformance in comparison to U.S. stocks. During the same period, the S & P 500 and the Nasdaq Composite have both added around 5%, while the Dow Jones Industrial Average is up by 3%. .STOXX YTD line Have European stocks got further to run? It is relatively rare for European stocks to rally by more than 6.6% in the first half of the year. The Stoxx Europe 600 index has risen 16 times, in 38 years, in such a manner since 1987. On average, when stocks do rally like they have in 2025, they return a mere 4.1% in the second half, according to CNBC’s analysis. However, there’s good news for investors. When stocks rallied in the second half, after a bumper performance in the first half, they went up by 11%. On the five occasions when stocks lost value in the second half, they fell by 9%. Wall Street’s view Looking at the fundamentals, though, asset managers and analysts are also bullish for the second half of 2025. In its mid-year outlook report, Goldman Sachs Asset Management said that although the bull run in Europe had been driven in part by a diversification away from U.S. assets, the shift “isn’t just about U.S. concerns.” “Europe looks appealing, and many investment opportunities are emerging across sectors in the region,” GSAM analysts said in the report. “Our primary focus is on identifying companies whose business are most likely to generate resilient earnings and high returns on capital.” Fiscal policies across the region, like historic debt reform in Germany and a commitment from NATO members – most of whom are European nations – to drastically hike defense spending , are creating investment opportunities in defense, energy and infrastructure, they argued. “We see potential opportunities in the equity markets across geographies and sectors — including Europe and small caps, among others,” they said. “Globally, companies with key differentiators and pricing power may have enhanced appeal in a world of higher tariffs.” Within Europe, GSAM said it was identifying companies with strong ties to defense spending. “Europe’s equity market, which has high financial and industrial sector weightings, offers useful diversification for portfolios allocated to US equities,” they added. ‘Substantial and lasting change’ Frédérique Carrier, head of investment strategy for RBC Wealth Management in the British Isles and Asia, agrees that there are opportunities to be found across Europe. In her mid-year outlook report, Carrier argued that structural changes in Europe had the potential to pave the way for “substantial and lasting change.” “The MSCI EMU (Economic and Monetary Union) Index, a proxy for European equities, trades at a price-to-earnings valuation of 15.4x 12-months forward consensus earnings forecast, roughly in line with its long-term average. It also trades at a discount to U.S. equities even on a sector-adjusted basis,” she said. Carrier said RBC preferred sectors in Europe that were likely to benefit from new fiscal stimulus. Those included certain industrials, like defense and materials, as well as some financial stocks. “In our view, banks should benefit from the region’s improved medium-term growth outlook and a steeper yield curve, while continuing to offer attractive shareholder returns via dividends and share buybacks,” she said. “We are mindful that sectors subject to tariffs as well as those exposed to a strong currency are less likely to outperform.” ‘Time for a little more caution’ However, some market watchers are making a case for taking a more wary approach to global equities, particularly those listed in Europe. “We as a team think it’s time for a little bit of more caution at this stage, because the reality of the economic outlook over the next six months or so is that of the effect of tariffs still coming through,” Julius Bendikas, European head of economics and dynamic asset allocation at Mercer, told CNBC’s “Europe Early Edition” on Friday. “The hard data, in our view, is likely to turn sooner rather than later. The labor markets are still gradually cooling, so the economic fundamentals are a little bit softer, the valuations look a little bit stretched, and while the market technicals have been fairly bullish at this stage, I think the fundamental picture is still a bit softer.” While he acknowledged European equities’ outperformance in the first half of the year, Bendikas said he did not see a case for continuing to favor regional stocks. “I wouldn’t be calling an overweight or underweight of Europe versus U.S., but we do think that playing [the] Europe narrative still very much via the euro is the best expression at this stage, and therefore would still advocate for euro versus dollar weight,” he told CNBC. “But on the equities side, I would say we argue for neutrality.” He also recommended favoring fixed income over equities, naming U.K. government bonds – known as gilts – “the asset class of most interest.” Meanwhile, Bank of America strategists also remain bearish on European equities. In a Friday note to clients, BoA’s Sebastian Raedler, Thomas Pearce and Andreas Bruckner acknowledged that the economic growth story for the euro area is improving, but said they were “sceptical about clear-cut upside this year” as German fiscal stimulus would take time. “We expect global growth to slow on tariff-related pressures, which should lift European equity risk premia and lower earnings,” they added. “We stay negative on EU equities.” They said their projections implied a 10% downside ahead for the Stoxx 600. “German fiscal beneficiaries have started to roll over, including defence and construction, but utilities, connected to German stimulus via climate and energy transition plans, have continued to outperform, with the sector’s price relative up 24% since February and starting to overshoot their key macro drivers,” they added. “As a consequence, we lower utilities from overweight to marketweight.”
