European Equity Market Outlook: Investing Strategies for 2025 and Beyond

European equities stand at a pivotal moment, driven by shifts in defense, policy, and global positioning. Investor options are narrowing due to fewer IPOs, delistings, and a decline in new fund launches. 

While the first half of 2025 saw a shift to positive flows, driven by the growing dominance of passive investing in Europe, the asset class has struggled to capture investor interest in recent years. Meanwhile, as the uncertainty surrounding tariffs continues to loom, European equities may be more exposed than US stocks to trade shocks due to their large share of international revenue streams. 

Our European Equity Landscape report delivers an actionable overview for advisors on key market trends, valuation highlights, and fund selection strategies in European equities. For complete analysis, download the full report.

Overall, the landscape is rapidly transforming as passives continue to gain market share across most European equity categories. Positive flows in 2025 remain focused on passive products, which now represent nearly 40% of assets under management, surpassing actives in the dominant large-cap blend space. 

Exchange-traded funds are also gaining in popularity and now account for around one-fourth of the overall assets under management, despite lacking the tax incentives that are fueling their adoption in the US. 

Ongoing fund mergers and closures are shrinking the universe, with listings declining and Europe’s weight in global indexes halving over two decades. The pressure on active managers is increasing. 

Out of approximately 2,000 unique funds and ETFs in operation, half of them have less than EUR 100 million in AUM, and about one-third less than EUR 50 million. Single-country categories are also growing out of fashion: Morningstar retired the Netherlands equity category in 2025 as the peer group slowly melted away. 

In less than 20 years, the weight of Europe-domiciled companies in the Morningstar Global All Cap Index has halved, from 30% in mid-2008 to around 15% in July 2025, reflecting Europe’s shrinking relevance in global equity markets.  

The US-domiciled Europe Stock category is now dominated by passive options, with fewer active funds available. Vanguard and iShares command around 50% of the market. US investors have a narrowing range of options with just 15 active funds available today. 

BlackRock recently repurposed its US-domiciled fund by changing its investment process and name—from BlackRock EuroFund to BlackRock International Select Equity Fund. 

Unpredictable shifts from quality to value, and now momentum, have made market timing unreliable, and recent macro events have altered sector leadership. 

Early on, quality was the leader.  Then in 2022, rising inflation led to value taking the lead. Now, the momentum factor has delivered exceptional results by overweighting high-flying names like Rolls-Royce Holdings or, more broadly, banks.

Industrial, financial, and healthcare sectors present primary opportunities, but the shrinking technology sector and dominance of large-caps make outperformance difficult for active managers. Over two-thirds of recent returns came from financial and industrial sectors. 

The industrial sector’s weight in the Morningstar Europe All Cap TME benchmark has almost doubled in the last decade whereas tech represents just a high single digit of the European market. 

Banks and aerospace and defense also had strong contributions to returns. The key challenges for European active managers––especially stock-pickers––were represented by the limited opportunities to outperform in sectors like tech, healthcare, and consumer.  

Underperformance in small- and mid-caps, along with ESG-driven underweights in defense and tobacco, has further challenged active management. It’s routine for European equities funds and ETFs to adopt some form of ESG-driven exclusions. For example, over half of the cohort excludes tobacco stocks. 

Morningstar’s Active/Passive Barometer shows high fees, fund closures, and style headwinds also weigh on active managers’ success rates. In single-country categories like Italy and Spain, concentrated indexes—especially in banks—have made it extremely tough for active funds to keep up. Large-cap 10-year success rates continue to fall but 1-year success rates are showing improvement.  

European equities offer modest upside, but notable value exists in healthcare and consumer cyclical sectors, especially among small- and mid-cap value stocks. However, tariffs loom over both sectors.  

Telecoms and financial services are currently overvalued sectors. Around 40% of stocks under our coverage are either 4- or 5-star stocks, with less than 20% of stocks in overvalued territory. Five-star stocks are present in every sector, excluding energy and telecoms, highlighting the dispersion of opportunities. 

We maintain a Neutral view on Europe ex-UK Equity. From a top-down lens, valuations are moderately unattractive, but we find moderately attractive opportunities at the stock level resulting in a Neutral score. 

We view UK equities as moderately attractive, and there are some opportunities at the stock level. From a macroeconomic perspective, the UK is in pretty good shape, with GDP growth forecasts pointing to an incremental improvement in 2024. Inflation remains high, relative to the rest of Europe, but some of this includes temporary effects that we expect  to fall off.  

Risks remain, but with a tariff agreement already in place with the US, the UK market is unlikely to experience the same level of volatility in the second half of 2025 than it did earlier in the year. 

Morningstar Manager Research team covers more than 70 active strategies from 30 asset managers across European equity categories, collectively responsible for around EUR 125 billion in assets as of August 2025. Some of the leading funds in our coverage include: 

• Comgest and Fidelity in the large-cap growth category 

• BlackRock, Brandes, and M&G for top picks in value  

• Wellington and Robeco in the blend category, per our analysts 

For the Europe Ex-UK and Eurozone, top picks include: 

• Comgest 

• Fidelity 

• M&G 

• Schroders 

For Flex-, Mid-, and Small-Caps: 

• Magallanes 

• Montanaro 

• Other boutique managers 

Overall, European equity markets are contracting in breadth and scope, while selection remains more critical as sector and style leadership fluctuates.  

Advisors should review client exposures, focus allocations on sectors and fund managers with proven resilience, and leverage Morningstar’s top active fund recommendations to diversify effectively. Morningstar Direct can help you find the right mix of strategies and ultimately build more diversified portfolios.