Key Takeaways
- Europe Regains Investor Attention: European markets are showing fresh momentum amid fiscal expansion and geopolitical shifts. Amid growing investor interest, Europe is re-emerging as a competitive alternative to U.S. equities with the STOXX Europe 600 up nearly 7% in the first quarter, driven by sector strength in defence and financials versus the S&P 500, which was down almost 0.5%1 .
- Attractive Valuations and Policy Tailwinds: European equities remain discounted on a forward valuation basis relative to U.S. peers. Combined with fiscal support, infrastructure investment, and rising defence budgets, this creates a supportive backdrop for long-term growth.
- Diversification in a Shifting Global Landscape: As U.S. uncertainty rises, investors are rebalancing toward international exposure. Europe’s resilience, lower inflation risks, and evolving leadership may offer meaningful diversification through targeted regional ETFs.
Rising geopolitical uncertainty and the threat of tariffs are prompting investors to reassess their global allocations—and increasingly, that means reducing exposure to U.S. markets. The first quarter of the year unfolded against a backdrop of shifting diplomacy, political transitions in key economies, and efforts to resolve ongoing conflicts.
Despite this, Europe was off to a strong start. As of the first quarter, Europe’s major stock index delivered a positive performance. In contrast, the main U.S. index lagged.
After years of underperformance, European financial markets are showing renewed strength, driven in part by shifting global trade dynamics and evolving geopolitical leadership. As the U.S. rethinks its long-standing role in global security and commerce, investors are increasingly turning their attention to opportunities across the Atlantic.
Additionally, the euro reached its highest level in recent years, while German government bonds have outperformed U.S. Treasuries. Despite headwinds from ongoing trade disputes, European equities have demonstrated notable resilience, outpacing their U.S. counterparts.
An Investment Case for Europe
This reawakening of Europe’s capital markets could mark a structural shift, offering potential for investors looking to diversify geographically and position portfolios for a new era of global realignment.
“The deviation in valuations between US and European markets has grown in recent years, but there’s potential for that gap to come in as investors begin to question the theme of U.S. exceptionalism, and we’re already seeing some of that occur,” says Alex Smahtin, Portfolio Manager and Senior Analyst, Investment Management at Global X.
These are some structural factors prompting renewed investor interest in European equities:
- Fiscal policy in Europe is shifting toward greater spending, supporting domestic growth across the region.
- Questions are emerging around the long-term return potential of U.S. mega-cap tech stocks, which have dominated global performance in recent years.
- Rising tariff risks could weigh more heavily on the U.S. than Europe. U.S. protectionist measures could stoke inflation and add to economic uncertainty—two headwinds for growth and consumer confidence. Europe, meanwhile, might feel less inflationary pressure from trade disruptions.
The price-to-earnings ratio is a commonly used measure of a company’s valuation, which is used to help investors determine if a particular stock is over- or undervalued. As seen in the chart below, valuations remain compelling. European equities continue to trade at a discount relative to their U.S. peers, potentially offering investors attractive entry points in a shifting global landscape at a time when Europe appears poised to reawaken economically.
Germany: Investment Über Alles
Germany boasts the largest economy in the Eurozone and the third largest among individual countries globally.2 Its economy is also diverse with the nation’s industrial, manufacturing, financial, and technology sectors supporting exports as well as domestic consumption growth.
The nation’s new coalition government is planning to put hundreds of millions of euros into stimulating the economy and improving the nation’s infrastructure. The new government is expected to take action on key policies, which could lead to structural energy and fiscal reforms. Germany has also agreed to expand its defence and infrastructure spending to as much as US$547 billion.
One beneficiary of Germany’s anticipated spending is defence company Rheinmetall, which signed its largest-ever framework contract with the German Armed Forces for the digitization of infantry soldier systems. The agreement, valued at up to EUR 3.1 billion (US$3.2 billion), will run until the end of 2030.
The company’s stock has also displayed remarkable performance in recent years:
“The Best Defence”
European Union (EU) nations spent EUR326 billion on defence in 2024, driven by prolonged conflicts in Ukraine and the Middle East, as well as a global push to modernize aging military equipment.
World military spending reached US$2.7 trillion in 2024, an increase of 9.4% in real terms from the prior year and the steepest year-on-year rise since at least the end of the Cold War. Around 55% of global military spending was carried out by members of NATO with Germany and the United States amongst the world’s top five military spenders, according to the Stockholm International Peace Research Institute.
| 2024 World Military Spending | US$2.7 Trillion |
| Share of Military Spending by NATO | 55% |
| Increase in European Military Spending | +17% |
According to research from Goldman Sachs, leading European nations will be increasing their defence spending in the coming years.
How to Invest
A surge in global defence spending is expected to benefit companies offering advanced systems such as artificial intelligence, cybersecurity, and autonomous weapons. The Global X Defence Tech Index ETF (SHLD) is the first ETF in Canada providing access to global defence companies involved in the development and manufacture of military hardware and software.
As investors look away from volatile U.S. markets, European markets, with their better valuations, could be a new destination.
Global X also offers access to Europe through its Equity Essentials suite of ETFs, some of which invest in the MSCI EAFE Index (EAFE is short for “Europe, Australasia, and the Far East”).
“Broad EAFE ETFs are a natural ‘one-stop-shop’ solution for investors looking to diversify their geographic exposure without necessarily needing to bet on a given country,” Global X’s Smahtin adds.
“This is particularly prudent given the remaining uncertainty around tariffs and how individual countries will be impacted in coming months and years.”
This MSCI index covers 21 developed markets around the world, with 46% of the index’s 766 constituents based in Europe as at April 30, 2025. For investors looking to capitalize on Europe’s relative value and improving outlook, Global X’s regionally focused ETFs offer diversified access to leading European companies.
European markets are gaining traction as fiscal stimulus, defence spending, and policy shifts support growth. With valuations still attractive and geopolitical risks weighing on U.S. assets, investors are reconsidering their global allocations. Europe’s renewed resilience may offer diversification benefits and long-term opportunity through targeted exposure to regional equity strategies.
Related ETFs
SHLD – Global X Defence Tech Index ETF
EAFX/EAFX.U – Global X MSCI EAFE Index ETF
EAFL – Global X Enhanced MSCI EAFE Index ETF
EACC – Global X MSCI EAFE Covered Call ETF
EACL – Global X Enhanced MSCI EAFE Covered Call ETF
SOURCES
1 Source: Bloomberg as at May 6, 2025.
2 Source: Statista as at February 12, 2025, The 20 Countries With the Largest Gross Domestic Product (GDP) in 2024.
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Published May 16, 2025.