European stocks are emerging as unexpected growth trade

European markets have “woken up” and investors are starting to take notice.

The EURO STOXX 50 is up nearly 14% year-to-date, outpacing the S&P 500’s more modest 2.4% gain, as a historic shift in European fiscal and defense policy reshapes market expectations.

The European rally follows the unveiling of a sweeping "whatever it takes" approach to economic and military spending by incoming German Chancellor Friedrich Merz.

This marks a fundamental break from Germany’s traditionally tight fiscal policy, setting the stage for higher growth, more government investment, and structurally higher bond yields across the continent.

According to Nabil Milali, multi-asset and overlay portfolio manager at Edmond de Rothschild Asset Management, these developments have upended long-held assumptions about Europe’s economic trajectory.

“There are decades when nothing happens, and there are weeks when decades happen,” Milali told InvestorsObserver. “The changes announced in Germany represent a definitive break with past policies, setting the stage for stronger cyclical and structural growth.”

Germany’s spending plan is game changer for Europe

Merz’s proposed fiscal package includes €500 billion in infrastructure spending over the next decade, a removal of defense spending from the country’s debt brake, and an expanded ability for regional governments to run deficits.

These measures are expected to lift German GDP growth from a projected 1% in 2026 to as high as 5% by 2028, according to initial estimates.

While execution speed remains a question mark, Milali sees this as a long-term structural shift rather than a short-term stimulus. “The impact will depend on how quickly these funds are deployed,” he noted. “Military spending has a relatively low fiscal multiplier, but public investment—particularly in infrastructure—can have a much larger impact on growth over time.”

Germany’s move is already sending shockwaves through European bond markets, triggering the biggest single-day rise in German yields since 1990 and pulling other European yields higher as well.

Investors are now pricing in both stronger growth prospects and significantly increased government debt issuance across the continent.

Europe is unexpected growth story

The scale of this transformation means that Europe is no longer just a value play — it’s becoming an active growth story, something U.S. investors can no longer ignore.

While concerns remain about debt sustainability in France and Southern European economies, there is already discussion of a €150 billion European loan program to help finance increased military spending across the bloc.

“Europe’s entire economic framework has shifted in a matter of weeks,” Milali said. “This is the price the continent is paying to assert itself in an increasingly threatening geopolitical environment, and for investors, it’s a paradigm shift that needs to be taken seriously.”

With Wall Street increasingly focused on diversification and growth opportunities outside the U.S., European stocks may finally be emerging from the shadows.