European stocks finish 2025 near records as STOXX 600 slips

Thin year-end trade leaves STOXX 600 near records

European stocks edged lower on Wednesday, Dec. 31, 2025, but the pullback was small enough to keep the region near records into the year-end. The pan-European STOXX 600 slips inched 0.2% lower to about 591.79 by late morning in Europe, and the small slip caps a year of gains as portfolio managers finish final rebalancing.

The final session was shaped by thin liquidity. Markets in Germany, Italy and Switzerland were already shut, while exchanges in the UK, France and Spain ran abbreviated hours, a setup that can magnify index moves and swing the euro on modest order flow.

Banks and defence carried 2025, even as the last session softened

The year’s leadership stayed intact. Banks were set for a 67% gain in 2025, their best annual run since 2008, helped by stronger dealmaking and a perception of a lighter regulatory environment. Defence stocks were still on course for about a 56% rise as governments backed higher spending, even though the defence subindex slipped around 0.2% on the day.

Basic resources fell about 0.3% and technology eased roughly 0.4%, a reminder that sector dispersion remains the dominant feature of the STOXX 600 2025 performance heading into 2026, with lenders continuing to lead.

Country scorecard: Spain leads, Germany strong, France held back by bonds

Spain’s IBEX was on track to gain close to 50% for the year, outpacing peers as lender earnings and capital returns stayed strong. Germany’s DAX posted a 23% advance; the DAX 23% advance was supported by government fiscal support measures and strategic infrastructure investment that steadied sentiment around industrial earnings.

France was the laggard among major markets, with the CAC 40 headed for about a 10% rise. The CAC 40 bond yield pressure was a recurring theme as fiscal uncertainty pushed borrowing costs higher, lifting the discount rate used to value equities. The UK’s FTSE 100 was set to climb about 22% for a fifth straight annual gain.

London closes early as FTSE 100 logs best year since 2009

In London, the FTSE 100 ended the shortened session down about 0.2%, and the domestically focused FTSE 250 fell roughly 0.4%. Even so, the FTSE 100 best year since 2009 left the index as a standout after years of underperformance, helped by its heavy weighting to global financials, miners and energy-linked cash flows.

The index’s winners reflected that mix. Mining names benefited from higher gold, silver and copper prices, while defensives with international revenues gained from currency moves. Bunzl and Diageo were among the biggest laggards, each down around 37% over the year.

A softer dollar and valuation discipline pushed flows toward Europe

A weaker U.S. dollar through 2025 reduced the currency hurdle for non-U.S. assets, while expensive U.S. technology valuations encouraged some investors to rotate toward lower-multiple earnings in Europe.

“I think the falling U.S. dollar and White House volatility have led investors to seek value elsewhere,” said Danni Hewson, head of financial analysis at AJ Bell. For markets, the channel is straightforward: sustained dollar weakness can support euro-area risk assets via global allocation flows, but it can also tighten conditions if it coincides with a jump in U.S. yields.

Rates and credit set the next test for European banks

As rate cuts work through the system, bank margins can compress, shifting the focus to fee income, loan growth and buybacks. That is why European bank stocks 67% gain in 2025 does not guarantee a repeat in 2026 if funding costs fall faster than lending yields.

Scope Ratings expects resilience with a changing mix. “Net interest margin normalisation is tailing off,” said Marco Troiano, head of financial institutions ratings, while pointing to recovering loan growth and fee income as supports. A faster widening in credit spreads would be an early warning sign that the cycle is turning.

What to watch next

The first data trigger is euro area inflation for December 2025, with the flash estimate scheduled for Jan. 7, 2026; a firmer print would likely push yields higher and pressure rate-sensitive stocks. The next policy waypoint is the European Central Bank meeting on Feb. 4–5, 2026, followed by the Bank of England’s Feb. 5 decision, events that can reset expectations for the euro and sterling.

Earnings season is the other catalyst, particularly guidance on net interest income for banks and margin discipline for defence names after a run of records. In France, sovereign spreads remain the fastest route from fiscal headlines to equity repricing.