Europe’s Bull Run: What's Fueling It and Will It Last?

“One of the most significant contributors to European equities' outperformance in 2025 has been the sharp appreciation of the euro against the U.S. dollar.”

After years of being underappreciated, Europe is re-emerging as an investable region where value, momentum, and policy alignment are beginning to work in concert. So far in 2025, European equities have delivered robust performance, outpacing many global peers and reflecting a shift in investor sentiment. As of July, the iShares Core MSCI Europe ETF is up 21.6% year to date, compared with an8.6% return from the S&P 500.

One of the most significant contributors to European equities' outperformance in 2025 has been the sharp appreciation of the euro against the U.S. dollar, over 10% through July. This move appears to be shaped by diverging monetary policy paths and evolving investor perceptions in light of more aggressive U.S. trade policy developments.

At the policy level, the European Central Bank’s earlier than expected rate cuts have been instrumental in shaping the investment landscape. The ECB began easing in January, well ahead of the U.S. Federal Reserve, bringing the deposit rate to 2%.The resulting boost to credit and consumption has supported growth across the euro area. Rate sensitive sectors, notably industrials and small cap equities, have responded particularly well.

Valuations have also supported the case for Europe. Even after this year's gains, European equities continue to trade at a meaningful discount to their U.S. counterparts, particularly relative to more fully valued segments of the American market. For many investors, including us, this valuation gap has warranted a closer look. In Q1 2025 we increased our model’s allocation to the iShares Core MSCI Europe ETF in recognition of these dynamics.

Policy developments within individual countries are also contributing. Germany’s €500 billion infrastructure and defense initiative, for example, is now translating into tangible capital flows. Aerospace and defense firms, in particular, have seen strong performance, buoyed by national and NATO backed investment commitments.

From a macroeconomic perspective, the data is becoming more supportive. Inflation continues to moderate toward the ECB’s 2% target, and GDP forecasts for late 2025 have been revised upward. Corporate earnings for the second quarter exceeded expectations, driven by both margin expansion and revenue strength, offering further validation for the market's recent rally.

On the geopolitical front, while a resolution to the Russia Ukraine conflict remains unlikely in the near term, a perceived reduction intensions has helped reduce regional risk premiums. This has supported renewed capital flows and greater confidence in the resilience of Europe's energy and supply chain infrastructure.

Looking ahead, Europe’s relative strength has firm foundations, but sustaining momentum will depend on central bank signals, inflation trends, and currency dynamics. While U.S. markets remain resilient, they face headwinds from policy uncertainty, stretched valuations, and trade risks. Europe, by contrast, is supported by accommodative policy, improving growth, and renewed investment. With inflation moderating and macro data firming, Europe’s outlook is constructive but currency volatility and shifting central bank narratives will remain key to watch in the back half of 2025.