Where Next for European and UK Stock Markets in 2025?
Christopher Johnson - 2 July, 2025 | 4:52PM
While the UK has agreed a trade deal with the US, negotiations with the EU continue ahead of the July 9 deadline.

Collage ilustrativo de un gráfico circular en el que aparece un inversor con unos prismáticos, un montón de monedas y un gráfico de bigotes.

Key Themes for European Stock Markets in Q3 and Q4

  • Germany’s spending plans will boost EU industry.
  • Investors expect more rate cuts.
  • Utilities and defense stocks in view.

European and UK equities have outpaced their US counterparts so far this year, despite the challenge from the trade war and escalating Middle East conflict.

Some fund managers suggest that the first half 2025 marked a decisive shift toward the continent’s once unloved equity markets, a move accelerated by President Donald Trump’s global tariff war. They argue that Europe’s bull run reflects a broader rotation out of US assets, helped by lower interest rates, falling inflation and improving economic fundamentals.

So, what’s the outlook from here? We look at which sectors and stocks are likely to benefit from ongoing positive investor sentiment toward Europe. And, as the Europe and US continue trade negotiations, we also look at the risks to the upbeat assessment.

Where Next for European Stocks?

The first question for investors is whether the third and fourth quarters will see a continuation of 2025’s trends, which include a rising euro, soaring defense stocks and rising European indexes.

Malcolm McPartlin, manager of Aegon Global Sustainable Equity, believes the bull run in European equities still has the momentum to keep going into the second half 2025.

The positive run, he says, is being fueled by a mix of structural factors: Germany’s fiscal reforms, rising defense budgets across the continent as part of a NATO commitment, and a period of stability in UK bonds.

“Suddenly, Europe looks like the safer bet. Can it last? The US still leads in innovation, but with tariffs biting and valuations stretched, the European equity renaissance might just have legs,” McPartlin says.

5 Charts on European Markets in 2025

Which European Stocks and Sectors Should Investors Watch?

Ben Kumar, head of equity research at 7IM, favors European mid-caps, a source of competitive advantage for the continent, because these stocks are “traditional businesses that make real world goods.” He says these industries benefit from Europe’s fluid labor market, but have been largely unloved by investors. He adds that there is now a lot of fund manager interest in this space.

Kumar is also bullish on global utilities, which he believes will deliver strong returns throughout the year.

Among his top picks is Spain’s Iberdrola IBE, which is striking deals with the Magnificent Seven tech firms to power their operations. He’s also backing National Grid NG., citing the UK utility’s dominant position in the US market.

Can Rolls-Royce Shares Keep Rising?

Kathleen Brooks, research director at XTB UK, is keen on UK large caps. She expects them to post gains in the second half, although she cautions that a small downgrade in earnings expectations may be on the cards due to the pound’s recent strength against the dollar.

Brooks sees particular upside in UK defense and consumer discretionary stocks.

“The potential for shareholder returns are high for the [defense] sector and we expect demand to remain elevated, which will strengthen revenue in the coming months.”

Despite strong gains already this year, Rolls-Royce RR. and BAE Systems BA. are among her top picks. Rolls-Royce is also on 7IM’s Kumar’s radar. He believes the market is underpricing its nuclear reactor business—it has recently won a contract from the UK government—and overestimating demand for its jet engines. He argues that the second half the year could see the market realizing Rolls-Royce’s nuclear capability in its valuation. Rolls-Royce was the biggest contributor to Morningstar UK Index gains in the second quarter of 2025, according to Morningstar Direct data.

Will the ECB Cut Interest Rates Again in 2025?

The Outlook for Interest Rates

There’s a divergence between UK and eurozone monetary policy: the European Central Bank has cut four times this year, while the Bank of England has cut twice. At 4.25%, key interest rates in the UK are more than double those in the eurozone.

Some market observers agree that the European Central Bank is nearing the end of its rate-cutting cycle, but they are also divided on whether one or two more cuts will follow this year—and how quickly they will come.

What's the Outlook for UK Interest Rates?

The June cut was the eighth since the easing cycle began a year earlier, during which time the ECB has halved the headline rate from 4% to 2%.

With eurozone inflation back near the 2% target and borrowing costs easing, many analysts believe the ECB may be near its terminal or neutral rate—the level at which monetary policy is neither stimulating nor restricting the economy.

Markus Hansen, co-portfolio manager of the Vontobel European Equity Fund, expects the ECB to make a couple more rate cuts, as inflation continues to fall. The latest Eurostat figures show that the rise in annual CPI is 2%, at the ECB’s target. In the UK, CPI rose by 3.4% on an annual basis in May.

Eurozone Inflation Back at ECB Target

Where Next for the Bank of England?

Market pricing suggests two interest rate cuts from the Bank of England this year, but inflation is above target. The Bank says that “a gradual and careful approach” to easing monetary policy remains the preferred course.

Goldman Sachs’ Asset Management midyear outlook says that market pricing “currently underestimates the extent of future easing by the Bank of England,” pinning the “terminal rate” at 3.25%, one percentage point below the current level.

Interest rate cuts tend to support equity markets because the cost of borrowing falls for companies and consumers, stimulating the economy.

Global Trade Wars Are Still Raging

ECB President Christine Lagarde laid out the potential risks to Europe’s future prosperity in a speech on June 17:

“We are witnessing a profound shift in the global order: open markets and multilateral rules are fracturing, and even the dominant role of the US dollar, the cornerstone of the system, is no longer certain.

“Protectionism, zero-sum thinking and bilateral power plays are taking their place. Uncertainty is harming Europe’s economy, which is deeply integrated in the global trading system, with 30 million jobs at stake.”

As with monetary policy, there’s a divide between the UK and Europe on trade. The UK has made a preferential deal with the US, whose terms kicked in on June 30: UK car manufacturers like Jaguar Land Rover can export to the US with a 10% tariff, while aerospace firms enjoy a 0% tariff for exports to the US.

The EU is on less favorable terms, facing the standard tariff rate of 25%—the pause on the April 2 tariffs expires next week, on July 9, and President Donald Trump has threatened the continent with a 50% tariff rate if a deal is not reached by then.

Vontobel Asset Management’s Hansen is confident that a deal can be struck, with the potential for “back and forth” trade chatter that is likely to spook the market until a deal is reached.

Looking ahead, Hansen notes forecasts showing eurozone GDP growth at near parity with the US by 2026. He also notes that while the UK continues to grapple with sluggish growth, targeted government spending in key sectors such as housing could provide a much-needed economic boost.


The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.