European stock market review – what's done well and what's next for European stocks?

It’s been an eventful start to the year for Europe.

So far this year, we’ve seen elections take place, an interest rate cut, a meeting of European leaders, and a fiery exchange between Zelenskyy and Trump in front of a live global audience.

We’re already seeing what looks to be an eventful year for Europe and global markets as a whole.

German election results – who won and what it means

Germany took to the polls in February. This came after Chancellor Olaf Scholz called snap elections when the coalition between the SPD, the Greens, and the FDP collapsed last autumn.

While the Christian Democratic Union (CDU) won the greatest share of the votes, the far-right AfD (Alternative for Deutschland) wasn’t far behind, with the SPD (social democrats) in third.

With no clear majority, coalition talks are now underway.

A two-party coalition between the CDU and SPD is expected, with the centre-right CDU leader Friedrich Merz likely to become chancellor.

Merz has pledged to reform Germany’s strict debt rules and increase defence spending. He also aims to support Ukraine during peace talks and achieve independence from the US.

While a coalition isn’t expected to be fully formed until Easter, investors have so far breathed a sigh of relief. Many will be welcoming the potential for political stability following what was a fractious three-party coalition.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice.

US-Ukraine relations intensify

Three years have now passed since Russia’s full-scale invasion of Ukraine.

It’s been a disheartening period, and since the re-election of Trump, there’s been even more uncertainty around how things might progress from here, and whether the US might look to rebuild its relationship with Russia.

Relations between the Ukraine and US recently intensified during a meeting between the two countries’ presidents in the US Oval Office. A fiery exchange, alongside US Vice-President JD Vance, in front of the global media, left many in shock and wondering how things will ultimately be resolved.

After a brief pause, the US has resumed arms deliveries to Ukraine. At the time of writing, US officials are scheduled to meet with Russian President Vladimir Putin to discuss a potential 30-day ceasefire between Russia and Ukraine.

However, it’s still a fluid situation and, whatever the outcome, investors should expect geopolitical tensions and market volatility to remain heightened throughout the coming year.

Remember, all investments and any income from them can rise and fall in value, so you could get back less than you invest. Past performance also isn’t a guide to the future.

How have European stock markets performed?

European stock markets have delivered a mixed performance over the past year (in sterling terms, to the end of February 2025).

Over this time, the broader European stock market, as measured by the MSCI Europe ex UK index, has grown 10.48%*. The broader global market, the MSCI AC World index, has done better, growing 16.10% over the same time.

The global stock market has benefited from its large allocation to the US, in particular large tech companies, which have performed well over the past year.

Stock market growth from Europe is still good for a one-year period though, and don’t forget that different markets and sectors will come in and out of favour. In fact, Europe has had a much stronger start to this year so far and performed better than the US. This is partly due to concerns over growth in the US and expectations for increased defense spending in Europe. Remember, a year is also a very short timeframe to look at performance.

Looking at countries individually, the top two European markets were the Spanish and German markets, up 35.18% and 22.93%. In fact, the Spanish stock market reached its highest point since 2018.

The country’s banking sector, which makes up around one third of its stock market, has performed well and benefited from higher interest rates that have led to higher profits.

Spain is also going through a period of economic expansion, benefiting from higher public spending and a booming post-pandemic tourism industry.

In Germany, the election outcome has been a tailwind, as has the potential for more investment in defence following Trump’s calls for greater spending in this sector.

On the other hand, the Danish stock market has been through a tough time, falling 16.21% over the past year.

This was partly due to the collapse in Novo Nordisk’s share price towards the end of last year. Novo Nordisk makes up around 60% of Denmark’s stock market, which means it has a significant influence over how the broader market performs.

Markets reacted negatively to disappointing data from the pharmaceutical company’s late-stage obesity trial for its experimental drug CagriSema.

Elsewhere, European smaller companies didn’t perform as well as larger companies over the year, but the MSCI Europe ex UK Small Cap Index still made 7.15%.

Investor sentiment, the outlook for economic growth, and higher interest rates can all have a greater impact on smaller companies that might have a less certain future compared to bigger players.

That said, earnings growth among smaller companies has generally been strong and share price valuations look attractive. Should sentiment towards this area of the market change, performance could improve, though as always there are no guarantees.

How have European Wealth Shortlist funds performed?

All European Wealth Shortlist funds have delivered a positive return over the past year, though the level of performance is mixed.

We usually expect this. A range of managers with different strengths, styles and areas of focus will perform differently in different economic conditions.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio. Yields are variable, and no income is ever guaranteed.