Europe’s strong performance has so far been linked to its indices’ limited exposure to artificial intelligence but managers are divided on whether this is truly an advantage.
Among the world’s 20 best-performing stockmarkets this year, every second index is European – a feat the region has achieved only three times before, according to Bloomberg.
With a month left in 2025, smaller European markets such as Hungary, Slovenia, and the Czech Republic have rallied over 60 per cent in US dollar terms, with Spain, Poland, and Austria close behind and Germany jumping 20 per cent in euros (34 per cent USD).
The results have come as somewhat of a surprise given that many strategists had initially forecast only modest gains for Europe, expecting the US economy to drive stronger performance on Wall Street.
Among other reasons, the region’s strong performance has been partly credited to its limited exposure to the artificial intelligence (AI) trade, seen by some as an advantage amid growing concerns of a potential bubble.
However, asset manager views on this stance are mixed.
Speaking to InvestorDaily, Ellerston Capital’s global mid-cap strategy portfolio manager, Nick Markiewic, attributed this year’s leaderboard dominance by smaller European indices in large part to a falling US dollar.
“This has significantly eased financial conditions and made non-US markets more attractive,” Markiewic said.
For this reason, and with the US dollar appearing to have stabilised, he said a longer-term re-rating of European markets seems unlikely. At the same time, he highlighted Europe-specific investment themes that have lifted indexes and appear likely to persist.
“These include a strong performance of financials as their earnings outlook has improved, and solid performance of defense and select industrials on expectations of continued fiscal spending by Governments, particularly Germany,” he said.
While Markiewic acknowledged that Europe’s lack of AI proxies relative to the US could help its indices in the short term if concerns over AI profitability materialise, he cautioned that this may not be a lasting advantage.
“Longer term, companies and stocks will trade around their earnings growth. On this basis, without more sustained fiscal stimulus, European EPS growth is still likely to lag the US, and as a result, I think it will be difficult for the market as a whole to outperform the US, particularly given the value now emerging in non-AI parts of the US market,” he told this publication.
France-based asset manager Amundi agreed, adding that Europe’s performance is uneven in places, and the region may be at risk of missing out if it doesn’t increase tech investment.
The firm’s deputy group chief investment officer, Philippe D’Orgeval, noted that while the region experienced strong growth momentum early in the year, it is ending 2025 with a slowdown driven by weak domestic demand.
“In 2026, higher infrastructure and defence spending add upside risk to an outlook that, in the face of weak external demand, still depends crucially on domestic demand resilience, monetary-policy support and timely, effective policy implementation,
“The euro area could also benefit from tech and AI investment, which might help close some competitiveness gaps, but investment in these areas remains dwarfed in comparison with the US,” D’Orgeval said.
He added that Europe lacks a dominant AI champion, trailing the US and China in technology spending, while energy supply concerns and slower fiscal support for tech investments constrain Europe’s AI potential.
Still, D’Orgeval said the aggregate fiscal stance is likely to remain “broadly neutral”, constrained by high debt levels and fiscal rules that push toward consolidation in many countries.
“With inflationary pressures easing, growth below potential, and decelerating wage growth reducing secondround inflation risks, European central banks will likely maintain an accommodative stance; the ECB [European Central Bank], in our view, is likely to ease more than markets currently expect,” he said.
Moreover, he said Europe still offers pockets of opportunity, especially in electrification, AI-related capital goods, and domestic-focused small- to mid-cap companies.
“These could benefit from a gradual productivity and innovation catch-up, provided Europe addresses infrastructure and skills development challenges. European financials can also benefit from rising financial requirements in a still supportive rate environment,” D’Orgeval said.
In its 2026 Outlook, the firm ultimately characterised European assets, alongside emerging markets, as key diversification opportunities amid high valuations and concentrated markets in the US.
D’Orgeval concluded that Europe’s path into 2026 will hinge on execution, as policy decisions over the past two years on energy security, defence, and other sectors must now be turned into viable projects, functioning markets, and operational resilience.
“Yet the challenges are real: bottlenecks in heavy rare-earth separation and magnet manufacturing, legal and political constraints on joint defence procurement, and the complex task of upgrading power grids for an electrified, AI-enabled economy,
“The coming years are likely to bring episodic tension over export controls, trade measures, and national politics, but in 2026-27 we should see the first visible signs of delivery where plans become concrete,” he said.
