The old advice to Americans was to vacation in Europe but never invest there. That is looking outdated.

Investor skepticism toward the continent has meant the region's outperformers often fly under the radar. For instance, total shareholder returns including dividends at European banks have beaten the Magnificent Seven over the last four years.

Europe just had its best reporting season in years. Companies in the benchmark Stoxx Europe 600 index boosted earnings per share by 18% on average in the second quarter compared with a year earlier. Earnings barely grew at all in 2025 and 2024 as the strongest companies in the index were offset by weaker players.

Growth is now widening beyond a narrow group of AI and bank stocks, according to Gerry Fowler, who leads the European equity strategy team at UBS. Government spending and private investment in priorities like infrastructure, energy security and defense are creating real opportunities.

The Stoxx Europe 600 is up 10% so far this year, a bit less than the S&P 500's 12% gain. European stocks have underperformed the U.S. since the mid-2000s, but the gap has narrowed lately.

Another reason why Europe's performance is improving is that laggards no longer have as much sway on the stock market. Carmakers and manufacturers of auto parts are getting battered by competition from China, but they now make up less than 2% of the Stoxx Europe 600's weighting.

A chunk of the recent earnings growth came from energy companies like BP and Shell that have benefited from higher oil and gas prices caused by the Iran war. Strip them out and European earnings still grew 7% in the second quarter, according to Sharon Bell, senior European equities strategist at Goldman Sachs.

That may not be spectacular by U.S. standards, but Europe no longer looks like a zero-growth economy. And for investors who are worried about an AI bubble, European stocks are a better hedge than emerging markets.

Tech companies make up a tenth of the Stoxx Europe 600's weighting, compared with around 40% of the S&P 500. The MSCI Emerging Markets Index, because it includes Taiwan and South Korea, also has 40% of its holdings in tech stocks such as chip makers Taiwan Semiconductor Manufacturing Co and SK Hynix.

Europe has a handful of AI stocks including world-leading chip equipment maker ASML. Some of the region's best-performing stocks this year supply materials for chip makers, such as France's Soitec, which is up 370% this year. Shares in Austrian printed circuit-board maker AT&S are also booming.

Industrial companies Siemens Energy and Schneider Electric are benefiting from demand for gas turbines and power-management technology among data center operators. Companies that make equipment to upgrade electricity grids are growing, too, because Europe needs to electrify its economy to reduce its reliance on imported energy. Prysmian, an Italian maker of underground and submarine cables for power transmission, is a winner from the electrification push, and its shares are up 40% this year.

Europe's bank stocks no longer trade at the rock-bottom valuations seen a few years ago. But they are benefiting from higher interest rates and continue to return cash to investors through share buybacks and dividends, says Blackrock's chief investment officer for fundamental equities, Helen Jewell.

Parts of Europe's economy have big challenges. Carmakers like Volkswagen are being squeezed by a flood of affordable Chinese electric vehicles. Consumer stocks are weak as Europeans are saving rather than spending these days. Alcohol companies like Diageo and Pernod Ricard are trading at valuation lows last seen during the 2008 global financial crisis and need to expand their businesses again in the U.S. to turn things around.

Europe will also take years to tackle problems such as its overreliance on imported oil and gas, and dense regulations that make its companies less competitive globally.

But businesses in the region are growing again and that is starting to attract capital. Last week was the first time since February that weekly inflows to Europe equity funds topped $1 billion, data from EPFR shows. Investors still overwhelmingly prefer the U.S., but some are starting to see Europe as more than a holiday destination