By Steve Garmhausen

European stocks are besting their U.S. counterparts this year, with the MSCI Europe index, which tracks stocks from 15 developed countries in Europe, up nearly 15% versus the S&P 500's 2.8% decline. It helps that European stocks started 2025 much cheaper than their U.S. counterparts. The big catalyst is that the region is expected to increase its military spending in response to Russian military aggression in Ukraine and a softening of U.S. support under the Trump administration. Germany alone is projected to increase its military and infrastructure spending by 1 trillion euros -- about $1.08 trillion -- over the coming decade. A key question: Will all of this anticipated spending translate into increased earnings for European companies? For this week's Barron's Advisor Big Q, we asked investment executives at wealth management firms whether they're increasing their allocations to Europe, and why.

Stephen Kolano, chief investment officer, Integrated Partners: It's ironic coming into 2025 that the run we've seen in Europe is happening. Because toward the end of 2024, more than a handful of clients, prospects, and advisors were like, "Why? Why do I want to own anything other than U.S. large-cap equity like the Magnificent Seven? Why do I have international?" I'd go through the reasons for global diversification, et cetera. Now I'm not getting any of those questions. I'm getting more questions like, "Do we own international? How much do we own?" So it has definitely caught the attention of a lot of a lot of investors and advisors.

We've been underweight developed non-U.S. equities, and Europe in particular. If anything, we'd been overweighting Japan recently. So now we are taking weight out of small- and mid-caps, in the U.S. in particular, and using that to fund a reduction in the underweight to Europe. We are probably on our way to getting closer to benchmark weight within developed non-U.S., with a focus in Europe.

Darrell Cronk, chief investment officer, wealth and investment management, Wells Fargo: We've been at a full weight in developed-market, ex-U.S. equities since the summer of 2024. So we had full weight going into this rally. We weren't pound-the-table favorable, but we weren't underweight either. That has served the portfolios quite well, because the MSCI EAFE index [which represents large and mid-cap stocks in 21 developed markets in Europe and elsewhere, excluding the U.S. and Canada] has outperformed the S&P year to date by 1,000 basis points or a little bit more. We've been talking about whether we should increase it to an overweight. Our strategy committee thinks this has run a little bit too far too fast, and people are chasing the rally right now on a little more optimism than is realistic.

Go back and look at developed markets, particularly in Europe, which is your biggest weighting in EAFE by far. In what environments does it outperform sustainably? What you typically find is that periods with a sustained move lower in the U.S. dollar bolsters their currencies. And while you've had that certainly for the past 90 days, I'm not sure I'd want to bet that the dollar gets materially weaker from here. We think quite the opposite. We could be kind of bottoming out. So we're watching it to see if there's a chance to go overweight, but I'm not sure I can do it here. The second important thing is that you have to have earnings deliver there too. It can't just be one big bet on military spending.

Sinead Colton Grant, chief investment officer, BNY Wealth: We're just shaving a little bit of our underweight to international and trimming a little bit of our overweight in the U.S. Here's the reason why we're not doing more: First of all, we think a large part of what has driven the outperformance year to date of international, and particularly Europe, was simply year-end rebalancing. We think the news out of Europe is very positive in terms of increased military spending, but there were a couple of things that we want to see before we would look at that more positively. The announcements from Germany and the positive signals from other elements of the EU to exclude military spending from fiscal constraints are extremely welcome. But there are a few areas that need a lot of investment. The first is broad industrial manufacturing capability. You've got to have those plants produced. And you've also got to see a lot of R&D and innovation in order to be at the leading edge in defense technology.

I think the reaction that we've seen so far is based on very positive sentiment, but not fundamentals yet. Another issue is that we're talking about circumventing some of the EU regulations that are budget related. But what about all the other regulations that have led to lower growth expectations in Europe, whether it's the regulations that make it hard to build factories, that require a certain proportion of green energy to be used in manufacturing. So I think the signals are good, but we need to see the fundamentals support it.

Viraj Patel, head of asset allocation, Fiduciary Trust International: I would describe our positioning as still neutral, but with a higher conviction. I think there is a paradigm shift with the recent fiscal thrust into the German and European pipeline as it relates to defense and infrastructure spending. Given how strongly U.S. stocks have performed relative to non-U.S. stocks, and Europe in particular, you do not want to be underweight, but I'm not sure that we are going to overweight. This is more about rebalancing, to get back onside.

What we are seeing in Europe is exciting investors, and rightfully so. There's a meaningful growth impulse in the pipeline from an economic growth perspective. For now, the early optimism from the fiscal thrust is manifesting itself in the form of rerating multiples higher, but from a very depressed level. That is well placed. But it will be interesting to see over the next couple of years whether European corporations can drive the E in P/E higher. Can the excitement and fiscal thrust that's in the pipeline translate into higher earnings growth? Keep in mind that we've almost captured a full year of returns in less than a quarter in U.S. dollar terms. So maybe the rally is a little bit overdone in the near term.

Write to advisor.editors@barrons.com

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March 26, 2025 16:19 ET (20:19 GMT)

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