Investors have made a sharp pivot from the US to Europe so far this year, positioning themselves for a hoped-for European comeback. It has, in large part, been driven by Germany’s fiscal stimulus and increased defense spending across Europe. This evident shift in investor sentiment has already resulted in Europe’s strongest relative start to a year since 2000.

The rotation out of US stocks and into stock markets in Europe has arguably been a long time coming. “Capital flowed in the other direction for a number of years as the US economy accelerated out of the pandemic, buoyed by Bidenomics, while the European economy languished, flirting with recession as recently as 2023,” says Michael Field, Morningstar’s chief European equity market strategist.

The bounceback in American stocks did not stop the great rotation away from US assets that’s taken place since President Donald Trump returned to the White House. However, the recovery in share prices doesn’t change the fact that we’re potentially seeing one of the biggest shifts in investor thinking in decades.

“Coordinated policy support for Ukraine and moderate fiscal expansion focused on infrastructure, innovation and healthcare are increasing Europe’s credibility as a geopolitical and economic counterweight to the United States,” says Andrew Lake, chief investment officer at Mirabaud AM. This has resulted in “an increased willingness of investors to reconsider European equity allocations and a rotation away from perceived concentration risk in the United States,” he adds.

With EUR 26 billion taken in, the period from January to March 2025 was the first quarter of positive flows into Europe equity funds after 12 quarters of net outflows in a row. Since then, with more than EUR 22 billion collected in April and May, the second quarter has the potential to become the best quarter in the past decade for Europe equity strategies. The record to beat belongs to the fourth quarter of 2015, with EUR 31.4 billion in inflows.

A Flood of Money Into Europe

Trump announced so-called reciprocal tariffs on April 2 after publicly threatening such a move in mid-February. Between April 1 and May 31 US equity funds and US equity ETFs domiciled in Europe attracted only EUR 274 million in combined net flows, reaching a flat organic growth rate.

For any given period, the organic growth rate is defined as the cumulative flow for the period divided by the beginning total net assets. It gives a more accurate sense of the magnitude of flows with respect to the size of the category in a given period.

During that same period, investors poured EUR 19.1 billion into European and eurozone equity funds and ETFs, which saw them grow organically at a rate of 2.47%. In particular, European large-cap blend equity strategies attracted EUR 10.4 billion of net inflows, producing a 4% OGR.

According to Morningstar’s Field, “the rate of outflows from the US and into Europe is not likely to continue at the same pace as we move forward,” because of the “unprecedented” scale of flows to Europe that followed Trump’s trade policies this year.

Those outflows “were driven by panic of how bad the situation could be for US stocks. So ultimately flows of this magnitude are not sustainable,” he adds. “But the concept of increased exposure to Europe is likely to persist.”

At the fund level, the Amundi STOXX Europe 600 UCITS ETF was the top seller in both April and May, with almost EUR 2 billion invested, producing a 20.2% organic growth rate over those two months.

Eroded Trust in the US Political System

As the shine of the Magnificent Seven group of US stocks has potentially worn off, and the prospects for the European economy have improved, it makes sense for investors to increase their exposure to the region. “We spoke loudly about the improving outlook for European equities last year, but the real catalyst was the Liberation Day tariff announcement,” explains Morningstar’s equity strategist.

“This act of self-harm has had two effects,” he adds. “The first is, short-term fear of the damage it could do to the US economy, which has increased the pressure on investors to move capital away from US equity markets. The second effect, more long-term, is that these tariff announcements have eroded trust in the US political machine, increasing the need for investors to seek less politically risky markets.”

As European equity markets have rallied, valuations have risen across the region. European stocks are still slightly undervalued according to Morningstar’s bottom-up analysis, and still slightly cheaper than the US market.

“As interest rates fall across Europe, this should be further supportive of the economy, and indeed business,” says Field. “This coupled with the implementation of the German infrastructure fund, and increased spending across Europe on areas such as defense, could be a boon for the region into the medium-term.”

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

Correction: An earlier version of this story contained a data error in the subheadline and two tables that understated the amount of European inflows. The correct amount of inflows in April and May is EUR 22.3 billion.