Strong fourth-quarter corporate earnings, higher defense spending, and a lack of direct tariffs targeting Europe from the US appear to have contributed to the surge in stocks from Paris to Frankfurt. Investors were not positioned for the strong performance, as evidenced by polling from Goldman Sachs conferences: A survey of more than 300 attendees at Goldman Sachs’ Global Strategy Conference in January found that 58% of participants expected US stocks to perform best in 2025. In contrast, only 8% thought that Europe would perform best, making it the least favored developed market.

We spoke with Goldman Sachs Research Senior Strategist Sharon Bell about what might be behind the rally in European stocks and her forecast for the rest of this year.

How much of Europe’s outperformance this year comes down to low expectations?

Investors were very skeptical about Europe going into this year — on the economy, on the impact of Trump policies and tariffs, and on growth. Because markets had already priced in a fairly weak growth profile this year, Europe only had to perform in line with expectations (or slightly better) and it could do very well.

The recent strong performance has been driven by proposals from Germany to spend more on infrastructure and defense, and in doing so bypass the restrictions of the debt brake. This is a huge change for Germany and for Europe, which has historically been reluctant to spend to boost growth. In addition, some of the strong performance is because the fourth-quarter company earnings season was reasonably good for Europe. And some of it is also that Europe so far hasn’t been targeted with tariffs by the US.

Stocks have also risen because of the growing understanding that Europe will have to spend more on defense: If there’s no peace in Ukraine, Europe spends more on defense; if there is peace in Ukraine, Europe has to ensure that peace and therefore spend more on defense. Either way, Europe spends more on defense, which helps defense companies.

How far has the valuation gap between US and European stocks closed?

US equities were at extremely high valuations at the beginning of this year. The US market is down a bit, meaning that US valuations have also come down — although they’re still in the 90th percentile of their historical range.

Meanwhile, European valuations have increased, and are now above the 50th percentile. Why is that? Because the European market, in absolute terms, has risen 10-12%, and earnings have not gone up — if anything, earnings-per-share estimates for this year are slightly down.

The US has gone down a fraction, and Europe’s gone up a fraction. So that elastic band that got stretched very far between US valuations and European valuations has come back in a tiny bit. It’s still very stretched, though — not because Europe is very cheap, but because the US is still near historically high valuations.

Is there more room for European stocks to rise?

I do still see upside for the remainder of this year: Our 12-month target still has 5-6% upside. But the market’s already up 10-12% since the start of the year, so I feel we’ve already had a lot of the returns on European equities.

Markets move in front of data and economic news. The economic news for 2026 and 2027 has got better for Europe: Our economists now expect German real GDP to expand 2% in 2027, mostly because of more government spending. That’s a large change from a flatlining economy in recent years. But the market priced that news in quite quickly.

It could be, because markets are volatile, that stocks come down a bit, get to a lower base, and then rally again. I do see a little bit of medium-term upside, because I think we’ll have positive earnings growth for the next few years, but that growth is unlikely to be very strong for Europe.

We’ve seen some early signs that could indicate weaker US economic growth. How could that impact European equities?

I think part of the sell-off that we’re seeing at the moment in US equities is a reflection of people reassessing the impact of this trade policy uncertainty. And it does look like it’s quite negative so far for the US economy — particularly for the consumer. We’ve seen consumer survey data on inflation expectations zoom up in the US.

Around a quarter of European companies’ exposure is to the US. So in the end, if the US economy is not growing as fast as people expect, then Europe won’t export as much to the US.

Many of the European companies with direct exposure to the US aren’t really exporters — they don’t produce in Europe and then send over to the US — instead, many of them actually own US businesses or divisions. So in a sense, there’s two ways in which weaker US economic growth would hit European companies: It would affect exporters themselves (and that in turn impacts European GDP), and it would also hit European companies with US businesses.

Having said all of that, we still expect reasonably healthy US growth this year. And if growth does weaken further, then with interest rates at the level they are, there’s always potential to soften financial conditions by bringing rates down. We don’t expect a recession in the US, but a slightly softer patch of growth is not so good for European companies, either.

What sectors look well positioned for growth in Europe?

Defense stocks have done extremely well recently. A basket of European defense stocks is up 67% since the start of this year (as of March 6). But that strong performance is partly based on future expectations. I think those stocks will probably still do well in the medium term, but there’s going to be a lot of volatility given how high valuations are now.

There are also some defensive sectors in Europe that are quite interesting. Healthcare is an area that we think has got a lot of possibilities for the next few years, and is not particularly expensive. We’re also seeing consolidation in some areas of telecoms, as well as regulators considering giving the telecoms companies more pricing power. Among cyclicals we like banks, which will benefit from improved European growth and higher long-term rates. Finally, we think that as well as defense stocks, fiscal spending and infrastructure companies more broadly should benefit.

Can Europe continue to outperform the US?

This is a question that I hear a lot from clients. In our asset allocation, we’re neutral on the US and Europe versus each other. To us, diversification is the answer, rather than the answer being “there’s going to be one winner,” as has been the case over the past decade.

I think there’s a sense that Europe can do a bit better if it can make a few key changes that it hasn’t managed to implement in recent years: improving its infrastructure, spending a bit more on defense, bringing down energy prices for consumers and industry, and Germany spending more fiscally to support its economy.

In particular, European industry has been hit by energy prices that are multiples of the price levels that you see in the US. One way to bring energy prices down is to build out your own energy capacity. Europe is certainly trying to invest more in renewables, and that will filter through. But the shorter-term way to bring down energy prices is to get more gas from Russia, through Ukraine. That will only happen if there is peace. From around 2027 onwards, there’s also going to be a lot more supply of gas from Qatar and the US. We think Europe will be a big beneficiary of that.

The breakthrough challenges the view that prohibitive investment costs are a barrier to entry for the largest, most powerful AI models. While it’s still being determined how Chinese researchers developed their AI technology and the full cost of it, a lower cost structure could help AI to develop and spread around the world more quickly, Joseph Briggs, co-leader of the Global Economics team, writes in the team’s report.

The “breakthrough could raise macroeconomic upside over the medium-term if its cost reductions help increase competition around the development of platforms and applications,” Briggs writes. “Limited adoption is still the main bottleneck to unlocking AI-related productivity gains, and adoption would benefit from competition-induced acceleration in the buildout of AI platforms and applications.”

“That said, the near-term adoption impact is probably limited since cost itself is not currently the main barrier to adoption,” he adds.

So far, the biggest barriers to near-term adoption reported by companies are a lack of knowledge about AI capabilities and privacy concerns, according to Census Bureau data. Just 6% of US companies report using AI for regular production, up from 4% in late 2023. 

How much will AI increase GDP?

Previously, the economics team’s baseline estimate was that widespread adoption of generative AI could raise US labor productivity by 15% over roughly 10 years, mainly by automating work tasks. That would unlock about $4.5 trillion of annual US GDP (in today’s dollars). The economic benefits are expected to accrue to hardware and infrastructure providers in the early phases, extend to the developers of platforms and applications in a later phase, and ultimately show up productivity and efficiency gains across industry more broadly.

The team has also forecast an AI investment cycle that peaks in the US at 2% of GDP before fading as the compute costs of training AI models and running AI queries fades. AI software investment was anticipated to increase steadily over time as end-user adoption increases.

Our analysts’ base-case forecast is for the satellite market to grow to $108 billion by 2035, up from the current $15 billion. In the most optimistic scenario, the market could grow to be worth as much as $457 billion in that same period. Roughly 53,000 of the estimated 70,000 launches over the next half-decade are likely to be from China, writes Allen Chang, head of the Greater China Technology Research team. 

atellites avoid “some of the difficulties faced by traditional ground-based infrastructure — such as difficult terrain or national boundaries,” Chang writes. But for LEO satellites to challenge traditional telecommunications services, some obstacles still need to be solved.

How much do satellite launches cost?

Due to their low altitude, LEO satellites have a narrow field of coverage. Moreover, to allow a sizable population to use LEO satellite communications simultaneously requires more satellites to ensure sufficient speed and bandwidth for each user. For example, if a single satellite provides 960 gigabits per second of bandwidth and transmits data at a speed of around 100 megabits per second, it would take around 460,000 satellites to cover half the world’s population.

Launch costs can be high: up to $12,000 per kilogram of satellite payload. Satellites can have higher latency, or lags in communication speed, than terrestrial transmission systems. Further, the short lifespan of LEO satellites will create a large amount of space debris, requiring an active debris management program.