By Yoruk Bahceli and Samuel Indyk
LONDON, Dec 18 (Reuters) – For European markets overshadowed by the United States since the summer, investors are hoping a spending bonanza in Germany – the European Union’s biggest economy – moves the dial in 2026. But first, they need to see evidence it will deliver.
A Ukraine peace deal could boost sentiment too. European stocks have barely recovered the cash that has left since Russia’s 2022 invasion of its neighbour.
European shares outperformed U.S. stocks in the first half of 2025. The region united to boost defence spending, Germany shook up its borrowing rules, and U.S. President Donald Trump’s tariffs dented investor confidence in American assets, generating a long-awaited MEGA, or “Make Europe Great Again” moment.
But as tariff fears have abated, European stocks, though continuing to rise, returned to their usual pattern of underperforming U.S. shares, while the euro remains below September’s four-year high near $1.20.
European equities have seen just over $86 billion of inflows in 2025, but the pace has slowed to $23 billion in the last six months, according to EPFR data tracked by Barclays.
They are projected to do well again next year but are nonetheless likely to remain in the United States’ shadow. Four of the six biggest U.S. and European investment banks expect Europe to lag, also due to U.S. markets’ greater exposure to the AI boom.
For the euro, much will hinge on how the U.S. dollar fares. Highlighting the uncertainty, two of the banks expect the European currency to drop.
“Now the focus turns on what Europe can do in terms of a ‘pull’ factor given the ‘push’ factor out of the U.S. isn’t going to be as pronounced as we thought,” said Arun Sai, Pictet Asset Management senior multi-asset strategist.
GERMAN DELIVERY KEY TO BOOSTING STOCK PERFORMANCE
In March, Germany, which accounts for roughly a quarter of the 28-nation bloc’s gross domestic product, overhauled its fiscal rules to boost infrastructure and defence spending, a potential game-changer for Europe’s economy.
But it has been using some of that leeway on day-to-day spending rather than the kinds of additional infrastructure that would boost the economy and stock performance more durably.
Infrastructure spending will pick up in 2026, but Barclays economists say that, looking across this year and next, social spending is rising faster.
Germany’s budgetary plans are “not as ambitious as we would have liked,” said Ross Hutchison, head of euro zone market strategy at Zurich Insurance Group, which favours U.S. stocks over European.
