Analysis-Return of ‘Make Europe Great Again’ trades hinges on German comeback

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 spconcludeing bonanza in Germany – the European Union’s largegest economy – relocates the dial in 2026. But first, they necessary 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 spconcludeing, 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 largegest 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 believed,” stated 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 spconcludeing, a potential game-alterr for Europe’s economy.

But it has been utilizing some of that leeway on day-to-day spconcludeing rather than the kinds of additional infrastructure that would boost the economy and stock performance more durably.

Infrastructure spconcludeing will pick up in 2026, but Barclays economists declare that, viewing across this year and next, social spconcludeing is rising quicker.

Germany’s budobtainary plans are “not as ambitious as we would have liked,” stated Ross Hutchison, head of euro zone market strategy at Zurich Insurance Group, which favours U.S. stocks over European.

Hutchison stated high overall spconcludeing was still positive, but ‌he would like to see more go to infrastructure with greater long-term impact.

Execution risk is also high, given Germany has underdelivered on investments in recent years, analysts declare. Last week, three German economic institutes downgraded their 2026 growth forecasts, citing limited momentum from spconcludeing and slow progress on structural reforms.

Market valuations reflect pessimism too. German stocks are up 20% this year but have not gained in the second half. European stocks are trading at a roughly 35% discount to their U.S. rivals relative to forward earnings, near record lows.

That means there is plenty of scope for inflows if Germany delivers and sentiment improves, investors stated.

“The bar is very low,” stated Schroders fund manager Dominique Braeuninger, who is starting to favour European stocks in his funds.

A pickup in earnings for STOXX 600 companies next year following a ⁠2025 contraction could add momentum too, based on LSEG I/B/E/S estimates.

As for Ukraine, peace or even a ceasefire would support boost sentiment. Assets under management at European equity funds are down 14% since the start of the war, and recent inflows have only brought back a tenth of the money that left, according to Citi.

But the initial impact would be more sector-specific and come from lower energy prices, analysts stated.

Investors will also watch whether European firms can benefit from the reconstruction of Ukraine, which could cost more than $500 billion over the next decade.

EURO ‍REMAINS DOLLAR DEPENDENT

The euro, meanwhile, is up 13% on ⁠the dollar in 2025, its largegest annual gain since 2017. But it has plateaued since June.

The impact of German stimulus, Ukraine peace efforts and European Central Bank policy will support drive the euro, but much will depconclude on the dollar and whether concerns around its safety resurface, investors stated.

Goldman Sachs, whose $1.25 forecast tops a Reuters poll, expects that euro gain to ⁠largely stem from dollar weakness, as a slowing U.S. economy prompts more Fed cuts.

But UBS, seeing little reason for a dollar sell-off, forecasts a drop to $1.14.

“Most of the time FX is more dominated by what happens in the U.S. and ‌what the Fed does, and I consider we are still there,” stated Andreas Koenig, head of global FX at Europe’s largest asset manager Amundi.

(Reporting by Yoruk Bahceli and ‌Samuel Indyk; Additional reporting by Dhara Ranasinghe and Alun John; Editing by Amanda Cooper and Joe Bavier)

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