European Stocks Surge in 2025: Banks Lead the Charge

In 2025, European stocks experienced a remarkable rally, with the Stoxx 600 index gaining 16%, marking all-time highs and outperforming the S&P 500 in dollar terms. Central to this surge were European banks, which saw a 65% increase, the sharpest annual rise since 1997. Analysts attribute this growth to strong earnings driven by increased fee and trading income, alongside reduced operational costs. Notable performers included Banco Santander SA, Societe Generale SA, and Commerzbank AG, all on track for their best year ever. JPMorgan Chase & Co. analysts described the current environment for European lenders as "perfect," forecasting continued growth into 2026, supported by stable rates and a recovering economy.

CityLab

The defense sector also saw significant activity, spurred by U.S. President Donald Trump's call for increased military spending among European nations. Companies like Babcock International Group Plc and Rheinmetall AG achieved record gains, with the latter entering the Euro Stoxx 50 benchmark. However, as efforts to resolve the Russia-Ukraine conflict progressed, defense stocks faced downward pressure. Analysts from Morgan Stanley noted that upcoming country-level defense budgets in 2026 would be crucial for driving order momentum and earnings estimates.

CityLab

While banks thrived, other sectors faced challenges. The automotive industry struggled with subdued demand and increased costs due to tariffs, marking its second consecutive year of losses. Companies like Volkswagen AG and Renault AG saw a rebound in demand for affordable electric vehicles, but overall, the sector remained under pressure from competition and economic uncertainties.

CityLab

In the consumer goods sector, Puma SE experienced a 50% decline, attributed to disappointing earnings and increased competition from rivals like Adidas AG. Similarly, Novo Nordisk A/S fell 48%, facing intense competition in the weight-loss drug market. In contrast, Abivax SA, a French biotech firm, surged 1,700%, becoming the best-performing stock in the Stoxx 600 after positive trial results for its experimental medicine.

CityLab

Despite the overall positive performance of European stocks, some analysts expressed caution. Concerns about macroeconomic uncertainty and the impact of tariffs on consumer spending were prevalent. The advertising sector, represented by WPP Plc, faced significant challenges, including a CEO exit and loss of major contracts, leading to a downgrade in guidance.

CityLab

Analysts from Goldman Sachs and Berenberg highlighted the favorable conditions for European equities moving into 2026, citing a compelling valuation gap compared to U.S. stocks and a positive macro backdrop. However, they emphasized that for continued success, earnings must also improve in the coming year.

CityLab

• “We enter 2026 with a continued and reconfirmed positive view on European banks,” — Kian Abouhossein, Analyst, JPMorgan Chase & Co.

CityLab

• “The next key development in 2026 will be detailed country-level defense budgets, which should drive order momentum and upside to earnings estimates, supported by company guidance updates,” — Ross Law and Marie-Ange Riggio, Analysts, Morgan Stanley.

CityLab

• “An eclectic mix of stocks has outperformed,” — Peter Oppenheimer, Chief Global Equity Strategist, Goldman Sachs Group Inc.

CityLab

In summary, while European banks have led a historic rally in 2025, various sectors face distinct challenges as they prepare for the upcoming year.

CityLab