For years, investors have viewed Wall Street as the benchmark for corporate strength and market performance. But as 2025 nears its end, Europe’s stock markets are showing unexpected momentum — and the long-standing performance gap with the US is narrowing faster than many anticipated.
Earnings Surprise: Europe Defies Expectations
European corporates have delivered their strongest earnings season in years. More than half of the companies listed on the Stoxx 600 index that have reported so far have beaten analyst forecasts, according to data from Deutsche Bank.
Overall, European companies have exceeded profit expectations by 8%, twice the region’s long-term average. This robust performance has prompted analysts to revise their forecasts upward for 2026, with earnings for the Stoxx index now expected to grow by 9% next year — not far behind the US market’s 14% projection, buoyed by the technology sector.
Sector Leaders: Banks and Insurers Drive Growth
The strongest results have come from banks and insurers, with UBS, Deutsche Bank, and Munich Re among those outperforming. Rising interest income, improved sales, and lower claims have supported the sector’s rebound.
Meanwhile, the traditional laggards — carmakers and utilities — have also shown signs of improvement. Mercedes-Benz, for instance, comfortably exceeded expectations, helping offset broader weakness across the automotive sector.
Economic Indicators Turn Positive
Europe’s improved earnings are backed by signs of stabilising growth. Purchasing Managers’ Index (PMI) surveys — a leading gauge of business activity — are now showing their strongest combined reading in more than two years.
In addition, the euro’s exchange rate has steadied after a volatile year. Earlier in 2025, the US dollar’s 8% slide against the euro hurt European exporters by reducing overseas earnings, but the recent currency stabilisation has eased pressure on profits.
Government spending initiatives across the EU, particularly in infrastructure, energy transition, and digital industries, are also expected to fuel corporate earnings into 2026.
Closing the Performance Gap with Wall Street
The improved corporate performance is reflected in equity markets. The Euro Stoxx index has risen 14% year-to-date, just shy of the S&P 500’s 16% gain. Analysts say Europe could even overtake the US before year-end if earnings momentum continues.
Valuations still show a wide gap: European blue-chip stocks trade at around 17 times forward earnings, compared with 26 times for their American counterparts. This lower valuation gives European equities more room for upside — particularly if investor sentiment continues to improve.
A Decade-Long Underdog Story
Europe’s stock markets haven’t outperformed the US on an annual basis in a decade. That long record of underperformance has made investors cautious. Yet this time, the fundamentals may be shifting.
With stronger balance sheets, improving macroeconomic indicators, and growing investor confidence, Europe’s long-sidelined equity markets are finally showing resilience.
If corporate earnings continue to rise and global trade tensions stabilise, the underdog of global markets may just sprint past the US in the final stretch of 2025 — marking a symbolic comeback for European business strength.
