A surprising hierarchy of sectors has emerged over the first half of the year, revealing renewed strength in European markets.

Although May is barely behind us and it seems early to be taking stock of the year, a number of strong trends have already emerged. Firstly, European equities have clearly outperformed US equities. What is particularly striking, however, is the hierarchy of sectoral performances in Europe, which at first glance appears puzzling.

A questionable ranking

At the top of the league table are two financial sectors (banking and insurance), followed by two reputedly defensive sectors (utilities and telecoms) and finally two cyclical sectors (construction and manufacturing). Given that investors are rational, how can we explain the fact that such different sectors end up posting similar relative performances?

YTD performance of Stoxx Europe sector indices dividends reinvested in Euro at 30/05/2025

Before looking for an explanation for this phenomenon, let's first try to show why this list seemed inconsistent at first glance.

Opposing performance drivers

When we look at the key performance drivers for these sectors, we find that financial stocks are highly sensitive to changes in interest rates, with listed companies in these sectors generally benefiting from rising long-term rates and steepening yield curves. In the case of banks, there is also a high sensitivity to economic activity: strong growth stimulating demand for credit and, conversely, a sharp slowdown increasing bad and doubtful debts. In both cases, these are sectors with a high beta, meaning that they generally amplify movements in the major market indices to which they belong.

Utilities and telecoms, on the other hand, are low-beta sectors, as their business is considered to be defensive because it is not very sensitive to macroeconomic ups and downs. However, they are also sensitive to changes in interest rates, but in the opposite direction to the financial sectors. In fact, companies in these two sectors are generally indebted and tend to underperform when interest rates rise, since their financial results generally deteriorate in this context.

Finally, construction and industrial companies are obviously very sensitive to the economic activity of the countries in which they operate, and these two sectors are naturally among the most cyclical on the stock market, and therefore have a very high beta.

At the end of May, sectors with little or no sensitivity to the macro-economic context were each recording very strong outperformance. Similarly, sectors both favoured and disfavoured by high interest rates have posted strong recent performances.

Beyond this observation, which is surprising to say the least, what are the reasons why investors favour sectors that have traditionally had such different dynamics?

A common factor: domestic roots

It seems to us that the main explanation lies in the "domesticity" of these different sectors.

Indeed, as we mentioned in the preamble, the European equity markets have regained their appeal in the eyes of investors this year, not least because of the narrowing of the growth differential with the United States. Economists have revised their growth expectations downwards in the US, while the German stimulus plan has raised hopes that Germany, Europe's economic juggernaut which has been at a standstill for the past two years, will regain positive momentum and drag the rest of the Eurozone in its wake. Added to this trend are the sharp fall in the dollar and the Trump administration's tariff threats, which are penalising European companies with exposure to this zone, whereas domestic European companies are relatively immune to these risks.

Exposure of European Stoxx 600 sectors to major geographic areas as a percentage of revenues

The special case of industry

One exception to these figures is the industrial sector, where exposure to Europe accounts for only around a third of sales. Indeed, within this vast sector of activity, most of the companies with a high level of international exposure, including the United States, have not necessarily performed very well on the stock market this year. On the other hand, this sector also includes defence companies, which should benefit from sharp rises in military spending in Germany and the rest of Europe, thanks to the European Union's ReArm Europe plan. The weight of these stocks in the index may not be significant, but their performance was such that this group of ten stocks alone accounted for two-thirds of the performance of the industrial sector on the stock market this year.

As we can see, the paradox is only apparent, and the sector hierarchy is ultimately based on the same logic that has led European equity markets to outperform North American markets, and investors to redirect their investments towards Europe this year. It remains to be seen whether this trend will continue, which will depend on the earnings momentum being maintained. For the time being, this is the case, with most of these sectors posting positive earnings revisions, while analysts have revised their estimates for the market as a whole quite sharply downwards. So not only will German growth have to pick up again in 2026 (compared with 2025, the third consecutive year of stagnation), stimulated by the budgetary measures announced at the start of the year, but it will also have to benefit neighbouring countries if companies' exposure to Europe is to be seen not as a potential drag, but as a source of opportunities.

Completed on 04.06.2025

The strange sectoral ranking of 2025

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