For much of the past decade, European equity markets played catch-up with Wall Street. That gap has narrowed. By late February 2026, the STOXX Europe 600 was up about 6% from the start of the year and trading near record highs, reflecting a broader reassessment of Europe’s prospects as investors responded to fiscal expansion, defence spending, and renewed sector strength.
The gap between U.S. and European valuations has become one of the more closely tracked spreads in global portfolio management.
This includes smaller European markets. Hungary, Slovenia, and the Czech Republic each rallied more than 60% in dollar terms in 2024, ranking among the world’s top 20 best-performing equity markets for the year.
AllianzGI projects European corporate earnings growth of 12% for 2026, a meaningful catch-up with U.S. counterparts and the strongest relative performance forecast in more than a decade.
The growth of the European equities market could mean that alternative finance firms like EquitiesFirst, which structure financing against existing equity holdings, will see growing interest from long-term investors seeking to deploy capital without liquidating core positions.
But the question animating institutional allocators is whether the conditions producing these moves — geopolitical disruption, defence spending, and fiscal reform — can sustain their momentum.
Since the outbreak of the Iran war in late February, the backdrop has become harder to read cleanly. The conflict adds fresh energy sensitivity and macro uncertainty to Europe’s recovery story, increasing the odds of volatility just as capital needs are rising, but it does not necessarily erase the case for renewed European strength.
The rupture
When Canadian Prime Minister Mark Carney addressed the World Economic Forum at Davos in January, he described the current moment as “a rupture, not a transition” in the international order, arguing that great powers had converted economic integration into a strategic tool, with tariffs as its primary instrument.
For Europe, the immediate flash points were U.S. tariff announcements targeting European exports and renewed geopolitical attention to Greenland’s strategic position. Those events reinforced the idea that the continent can no longer treat U.S. strategic and economic alignment as a fixed variable in its planning.
Germany scrapped its constitutional debt brake in early 2025, freeing up an estimated €1 trillion in infrastructure and defence spending capacity. The European Commission is pursuing a €1.2 trillion overhaul of the EU’s electricity grid by 2040, a project with direct implications for industrial energy costs and the continent’s exposure to commodity-price volatility. At the same time, the EU imposed tariffs of up to 35.3% on Chinese-made electric vehicles, introducing fresh friction into trade relations with Beijing even as some member states actively court Chinese investment.
These policy shifts have created a re-rating environment. Investors who spent the previous decade discounting European stocks for structural weaknesses — slow growth, regulatory complexity, and political fragmentation — are reassessing those assumptions. STOXX 600 defence stocks led the index in 2025, with seven of the top ten performers each gaining more than 90%.
Where policy meets capital
European households hold nearly €40 trillion in financial assets, according to Eurostat data, roughly 4.1 times total household liabilities. That private balance sheet depth, combined with improving corporate earnings and historically compressed valuations relative to the U.S., could prompt portfolio reallocation discussions among institutional investors and family offices.
Trade dynamics are also improving. A long-delayed agreement with the Mercosur bloc — encompassing Brazil, Argentina, and neighbouring South American economies — appears close to finalization. EU negotiations with India are at an advanced stage. Trade talks with the Philippines, Thailand, and Malaysia are proceeding in parallel.
Combined, these agreements could open demand corridors for European machinery, chemicals, and high-value industrial goods that could partially offset the disruption from tariff friction closer to home.
The SME bottleneck
The rally in European equities has not resolved one of the continent’s most persistent friction points. Intra-European trade fell for the first time since the pandemic in 2025, a signal that internal market integration has stalled even as external trade ambitions accelerate.
And for the 32.3 million enterprises that represent 99% of EU companies by count, the capital access gap is particularly acute. The ECB’s October 2025 bank lending survey recorded net tightening of credit standards for business loans, with rejection rates edging higher across firm sizes. Banks, managing capital adequacy under conditions of geopolitical and trade uncertainty, have remained conservative. Many smaller companies find themselves positioned to benefit from new trade corridors and infrastructure cycles while unable to access the growth capital to act on those opportunities.
EquitiesFirst and firms in the equities-backed financing space could offer an alternative route for entrepreneurs who hold significant equity stakes but face constraints in conventional credit markets.
The conditions that re-rated European assets from 2024 onward remain in place. Whether they develop into a durable investment cycle depends on policy follow-through, trade deal execution, and the capacity of European businesses — especially the small and mid-sized companies that form the continent’s commercial backbone — to secure the capital they need when opportunity windows open.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.
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