European Stock Market Report 2025: Banking Stocks Crowned "Annual Ace", Defense and Mining Build Winning Camp Together.

In a year of record highs, European stock markets have been strong, driven by the bull market in commodities and expansion in defense spending. However, the real star of the show is not these traditional hot spots, but long-muted bank stocks, whose astounding gains have attracted bets from multiple institutions, with this momentum expected to continue into 2026. The Euro Stoxx 600 index has already risen by 16% this year, hitting multiple highs and outperforming the S&P 500 index in dollar terms. Bank stocks have led the rally, benefiting from strong earnings and shareholder returns, with the sector surging by 65%, potentially achieving its largest annual gain since 1997. Peter Oppenheimer, Chief Global Stock Strategist at Goldman Sachs Group, Inc., said, "A diverse group of stocks is performing exceptionally well." However, he also noted that some of the worst-performing stocks this year were those facing unfavorable factors such as tariff hikes, a weak dollar, and competition from China. Looking ahead to next year, strategists believe that European stock markets have several favorable factors, including lower exposure to the bubble risk in highly valued tech stocks that have been driving Wall Street higher. Ulrich Urbahn, Head of Multi-asset Strategy and Research at Berenberg, stated, "Concerns about a further weakening of the dollar, the attractiveness of valuations relative to the U.S., and a positive macroeconomic backdrop should also bode well for the European stock market in 2026." However, he added that for European stock markets to perform well again, earnings must also show improvement next year. Here are some of the biggest winners and losers in 2025: Bank stocks surge The performance of bank stocks has far surpassed other industries. Increased fee and trading income, along with cost reductions, have seen bank profits soar, despite expectations that falling interest rates would impact profitability. Stocks of Banco Santander S.A. Sponsored ADR, French Industrial Bank, and Deutsche Bank are all set to have their best year ever. Analysts at JPMorgan, led by Qian Aboushne, believe that European banking institutions are in a "perfect environment" and will continue to rise. The team wrote in a report, "We confirm and maintain a positive view on the European banking sector and position ourselves for 2026." The team highlighted the continued improvement in the economic environment, along with stable interest rates, inflation, and unemployment rates as the core support for this view. Defense stocks shining stars With the acceleration of peace talks between Russia and Ukraine, the European defense sector saw adjustments in year-end trading. However, this did not change the overall strong performance of the sector in 2025 - driven by a policy of the U.S. urging European countries to increase military spending, defense stocks saw significant gains for several months. British warship manufacturer Babcock International Group had its best year ever and entered the FTSE 100. German weapons and ammunition manufacturer Rheinmetall also achieved its largest historical gain, successfully entering the Euro Stoxx 50 benchmark index. Defense system developer Indra Sistemas was the best-performing stock in Spain, soaring by about 180%. Analysts Ross Law and Mary-Ann Regio of Morgan Stanley wrote, "The next key development for 2026 will be detailed national defense budgets, which should drive order momentum and profit expectations upward, supported by updated company guidance." Mining stocks soar Mining stocks performed well, primarily driven by political concerns pushing up demand for precious metals and emerging electrification demand for powering artificial intelligence data centers pushing copper prices to record levels. Gold and silver miner Fresnillo Plc was the best-performing stock in the FTSE 100 Index in 2025, rising fivefold. Polish copper and silver producer KGHM Polska Miedz saw its stock price more than double. Pandora under pressure Jewelry company Pandora faced a tough year amid record silver prices pushing up its costs, leading to a 47% decline in its stock. This made it one of the worst-performing components of the Stoxx Europe 600 index, also dragged down by tariff concerns stemming from Thailand, a key production center, being targeted for tariffs by the Trump administration. Macroeconomic uncertainties dampened consumer spending, resulting in multiple earnings misses, and a downgrade in full-year growth forecasts in November. Respected CEO Alexander, Inc. Laisik is set to retire in March, and investors have raised questions about the strategic future of the jewelry company, casting a shadow over its development. Puma's sharp decline Puma's stock fell by 50%, experiencing its worst year ever. A disappointing start to the year, coupled with weak earnings, led to delays in profit targets and cost-cutting plans. More warnings followed, with the sportswear company announcing layoffs and plans to focus on core business, while its long-term competitors Adidas, On, and New Balance Athletics profited from the growing popularity of running. U.S. tariffs also posed a threat, with key manufacturing center Vietnam facing significant tariff hikes. Automobiles and chemicals continue to decline The European Automobile and Parts sub-index has seen its second consecutive year of decline, the first since 2002. Automakers face weak demand, rising costs due to tariffs, and competition from Chinese manufacturers. Automakers have been adapting to the transition to electric vehicles - although demand for affordable electric car models from Volkswagen and Renault has sparked a rebound. Amid tariffs and economic weakness, a drop in automobile demand has also weighed on companies providing coatings and finishing materials. Coatings manufacturer Akzo Nobel NV lowered profit expectations in October as customers directly impacted by additional tariffs reduced spending. Weak growth has also impacted the construction industry, while chemical companies are dealing with oversupply issues for certain products. WPP's plight Advertising company WPP Group is set to be the worst-performing stock in the Stoxx 600 index this year, as the company has had to deal with a series of challenges such as the CEO's departure, major contracts lost to competitors, and being removed from the FTSE 100 index. As the company grapples with concerns that clients may stop hiring professional advertising agencies due to AI, WPP has downgraded performance guidance. Generative AI has also negatively impacted Wolters Kluwer NV and RELX Plc, as investors fear that rapidly advancing technology may render research tools less useful.