Europe's Stock Market Comeback: Why XEQT's International Allocation Is Finally Paying Off in 2026

I have a group chat with four friends from university. We are all in our thirties now, all investing in one way or another, and for the better part of five years, the same conversation played out every few months. Someone would share a screenshot of their all-US portfolio – up 25%, up 30% – and then tag me with something like, “Hey, remind me again why you hold all that international stuff?” I would explain global diversification. They would send a laughing emoji. The S&P 500 would climb another 3% that quarter, and the cycle would repeat.

Then 2025 happened. And early 2026 happened. And suddenly, the group chat got very quiet.

The STOXX 600 – Europe’s broad market index – outpaced the S&P 500 over the trailing twelve months heading into mid-2026. The Euro Stoxx 50 posted its best start to a year in over a decade. Meanwhile, the Magnificent Seven stumbled, and the concentrated US tech trade that had seemed invincible started showing cracks. My friend who had been the loudest about “US only” sent me a private message: “Alright, how do I get European exposure without blowing up my portfolio?”

My answer was the same thing I have been saying for years: you do not need to do anything special. If you own XEQT, you already have it.

This post is not a victory lap. Markets rotate, and Europe could stumble again next quarter. But what is happening right now is a textbook example of why global diversification works – and why XEQT’s “boring” international allocation is anything but boring when it matters most.

1. The Context: How We Got Here

To appreciate what is happening in European markets right now, you need to understand what came before.

From roughly 2012 to 2024, US equities dominated global returns in a way that felt almost permanent. The S&P 500 delivered annualized returns north of 13% for the decade ending in 2024. Meanwhile, international developed markets – where Europe makes up the lion’s share – delivered something closer to 5-7% annualized over the same period.

This gap was not subtle. It was enormous. And it created a powerful narrative: TINA – There Is No Alternative. The thinking went like this:

• US tech giants (Apple, Microsoft, Nvidia, Google, Amazon, Meta, Tesla) were printing money at a scale never seen before
• European companies were seen as slow, over-regulated, and stuck in “old economy” industries
• The US dollar was strong, which made US assets even more attractive on a currency-adjusted basis
• Interest rates in Europe were negative for years, which felt like a sign of economic stagnation

For a Canadian investor comparing their XEQT returns to a friend’s pure S&P 500 portfolio, the temptation to abandon international diversification was real. I felt it myself. Every year when I reviewed my portfolio, I would see that XEQT’s international developed allocation – primarily through IEFA – was dragging down my overall returns compared to a US-only approach.

But I kept buying. Not because I had some crystal ball about Europe. Because I knew something that decade-long US outperformance had made easy to forget: leadership rotates.

2. Europe’s Comeback Story

So what changed? The short answer is: a lot, and quickly.

European markets did not stage a comeback because of one headline or one policy change. It was a convergence of forces that had been building quietly while everyone was watching Nvidia’s earnings calls.

Defence Spending Boom

The geopolitical shifts of 2022-2025 – the war in Ukraine, rising tensions in the Indo-Pacific, changing US foreign policy signals – forced European governments to get serious about defence spending. Germany alone committed hundreds of billions of euros to military modernization, scrapping its decades-old fiscal conservatism in the process. Countries across NATO ramped up procurement budgets, and European defence companies like Rheinmetall, BAE Systems, and Leonardo saw their revenues and stock prices surge.

This was not just a defence story. That government spending rippled through industrials, technology, and manufacturing across the continent.

Luxury Goods Resilience

Europe’s luxury powerhouses – LVMH, Hermès, Richemont – proved once again that premium brands are borderline recession-proof. After a brief wobble in late 2024 driven by fears about Chinese consumer spending, the luxury sector rebounded sharply as demand from the US, Middle East, and a recovering Asian consumer base surged. These companies have no real US or Asian equivalents at scale, and they sit inside XEQT through its international developed holdings.

Clean Energy Investment

The EU’s Green Deal and REPowerEU initiatives channelled massive capital into renewable energy, grid infrastructure, and energy efficiency. Companies like Siemens Energy, Vestas, and Iberdrola became beneficiaries of a multi-decade investment cycle. While US clean energy policy remained politically contested, Europe moved with more consistency and scale.

Banking Sector Recovery

European banks – long considered the sick man of global finance – staged a remarkable turnaround. After years of near-zero and negative interest rates, the ECB’s rate hiking cycle of 2022-2024 restored net interest margins. Banks like BNP Paribas, UBS, and ING posted their strongest earnings in years. And when the ECB began cutting rates in 2024-2025 to stimulate growth, it did so from a position where banks were already healthy and well-capitalized.

ECB Rate Cuts Stimulating Growth

Speaking of rate cuts – the European Central Bank moved faster and more aggressively than the US Federal Reserve in easing monetary policy through 2025. Lower borrowing costs began flowing through to consumer spending, housing markets, and business investment across the eurozone. GDP growth, while not spectacular, exceeded the pessimistic forecasts that had become consensus.

The cumulative effect of all this? European stocks went from “uninvestable” in the minds of many to “undervalued opportunity” practically overnight.

3. How Much Europe Exposure Does XEQT Actually Give You?

Here is where things get practical. If you own XEQT, how much of your money is actually working in European markets?

XEQT holds four underlying ETFs, and your European exposure comes primarily through IEFA (iShares Core MSCI EAFE ETF), which covers international developed markets excluding the US and Canada. IEFA is approximately 20-24% of XEQT’s total portfolio.

Within IEFA, European countries make up roughly 50-55% of the fund. That gives you the following approximate breakdown:

So your total European exposure through XEQT sits at roughly 10-13% of your portfolio. That might not sound like much. But here is the thing – it does not need to be a massive allocation to make a meaningful difference. When European markets outperform by 10-15 percentage points over a given period, even a 10-13% allocation contributes noticeably to your overall returns.

And critically, you did not have to do anything to get this exposure. You did not have to research European ETFs, worry about currency hedging, or decide how much to allocate. XEQT handled it automatically.

4. The European Companies Inside Your XEQT

One of the things I love about XEQT is that you end up owning companies you interact with every day – you just might not realize it. Through IEFA, your XEQT shares give you ownership in some of the largest and most important companies in the world:

• Nestlé (Switzerland) – The world’s largest food company. Nescafé, KitKat, Purina, S.Pellegrino. Revenue streams so diversified they are practically their own economy.
• ASML (Netherlands) – The sole manufacturer of extreme ultraviolet lithography machines. Every advanced semiconductor on the planet depends on ASML’s technology. If you think AI is the future, ASML is the company that makes the machines that make the chips.
• Novo Nordisk (Denmark) – The maker of Ozempic and Wegovy. This single company’s market cap briefly exceeded the entire GDP of Denmark. Weight-loss drugs became one of the biggest investment themes of 2024-2025, and Novo Nordisk was at the centre of it.
• LVMH (France) – Louis Vuitton, Dior, Moët & Chandon, Hennessy, Tiffany. Bernard Arnault’s luxury empire is a cash-generating machine with pricing power most companies can only dream of.
• SAP (Germany) – The enterprise software giant that runs the back-office operations of most Fortune 500 companies. SAP’s cloud transition has been one of Europe’s best tech turnaround stories.
• Shell (UK/Netherlands) – One of the world’s largest energy companies, generating massive free cash flow while navigating the energy transition.
• AstraZeneca (UK) – A pharmaceutical powerhouse with a deep oncology pipeline that has driven strong stock performance.
• Roche (Switzerland) – A leader in diagnostics and pharmaceuticals, particularly in cancer treatment.
• Siemens (Germany) – An industrial conglomerate benefiting from electrification, automation, and infrastructure investment trends.

These are not speculative bets. These are dominant, profitable, globally competitive businesses. And they are all inside your XEQT, working for you quietly in the background.

5. The Rotation Narrative: Why Money Is Moving

Let me explain what “rotation” means in plain terms, because it is at the heart of what is happening right now.

For years, money poured into a relatively narrow set of US technology stocks. The Magnificent Seven accounted for an outsized share of S&P 500 returns – in some years, removing those seven stocks would have cut the index’s return in half. This concentration created what many analysts called the most top-heavy US market in modern history.

By late 2024 and into 2025, a few things started to shift:

• Valuations stretched too far. US tech stocks were trading at 30-40x earnings, while European industrials and financials traded at 10-15x. At some point, the gap becomes too wide to ignore.
• AI monetization questions emerged. After years of pouring hundreds of billions into AI infrastructure, investors started asking harder questions about when (and whether) that spending would translate into proportional revenue.
• European earnings surprised to the upside. While expectations for Europe were rock-bottom, actual results came in better than feared – quarter after quarter.
• Currency tailwinds. A weakening US dollar made international returns look even better for non-US investors.

The result was a classic rotation: institutional money began flowing out of expensive US growth stocks and into cheaper international value and industrial names. European stocks, trading at historically wide discounts to US peers, were natural beneficiaries.

This is not a prediction that Europe will keep outperforming forever. It is an observation that markets do this – they rotate. And if your portfolio is only positioned for one region’s dominance, you will eventually be caught on the wrong side.

6. Why Timing International Allocations Is Impossible

Here is an exercise that should humble anyone who thinks they can predict which region will win next year.

If you had looked at international developed market returns at the end of 2023, you would have seen a decent but uninspiring year – nothing that would make you rush to increase your allocation. The narrative was firmly “US tech is king, everything else is an afterthought.”

By the end of 2025, the picture had flipped dramatically. The STOXX Europe 600 had one of its best two-year stretches in recent memory. European small and mid-cap stocks outperformed US small caps. The MSCI EAFE index beat the S&P 500 over the trailing twelve months for the first time in what felt like a generation.

Could you have predicted this in early 2024? Of course not. The catalysts – the speed of ECB rate cuts, the scale of European defence spending, the timing of the US tech correction – were not knowable in advance.

This is the fundamental problem with trying to time regional allocations:

• By the time a trend is obvious, most of the gains have already happened
• The turning points are driven by unpredictable events (geopolitics, policy shifts, sentiment changes)
• Even professional fund managers with teams of analysts and sophisticated models consistently fail to time these rotations

The data on this is clear and humbling. Studies show that global equity leadership rotates between the US, international developed, and emerging markets on roughly decade-long cycles:

You do not need to predict which row comes next. You just need to own all of them. That is what XEQT does.

7. The Numbers: US-Only vs. Global Diversification

Let me put some numbers to this, because the abstract argument for diversification hits differently when you see actual returns.

Here is a simplified comparison of how a $10,000 investment would have performed in different periods, comparing an S&P 500-only approach to XEQT’s globally diversified approach:

Note: These are illustrative approximations to show directional trends, not exact return figures.

The critical insight is not that one approach is always better. It is that the winner changes. And when it changes, it often changes fast and without warning.

If you had abandoned international diversification after watching the S&P 500 dominate from 2019 to 2024, you would have missed the very period when that diversification started paying off. You would have been buying high on US stocks and selling low on international ones – the exact opposite of what you want to do.

8. The Emotional Challenge Nobody Talks About

I want to be honest about something: holding XEQT through the years of US dominance was not always easy.

There is a psychological phenomenon called recency bias – the tendency to assume that whatever has happened recently will keep happening. When US stocks outperform for five years in a row, your brain starts to treat it as a law of nature rather than a phase in a cycle. You start questioning your strategy. You start thinking the people in your group chat might be right.

I went through this myself. Around 2023, I spent a weekend running spreadsheets comparing what my portfolio would have looked like if I had just gone 100% into VFV (Vanguard’s S&P 500 ETF for Canadians) instead of XEQT. The answer stung – I would have had meaningfully more money.

But here is what I did not do: I did not sell. I did not switch. I kept buying XEQT on my regular schedule. And the reason was not some superhuman discipline. It was because I had read enough market history to know that the best time to abandon diversification always feels like right before diversification starts working again.

The investors who switched from diversified portfolios to US-only in late 2024 – right when US valuations were peaking and European stocks were at their cheapest relative valuation in decades – made the classic mistake. They used the rear-view mirror to navigate forward.

XEQT removes this temptation by design. You do not have a “sell Europe” button. You do not wake up one morning and decide to cut your international allocation to zero. The fund rebalances automatically, and your job is simply to keep adding money. It is boring. It is frustrating sometimes. And over a full market cycle, it works.

9. Why This Validates the XEQT Thesis

Let me bring this all together.

The case for XEQT has never been “international stocks will always outperform.” It has never been “Europe is a great investment right now.” The case for XEQT is much simpler and much more powerful:

You do not know which region will outperform next, so own all of them.

What we are seeing in 2025-2026 is not a reason to suddenly get excited about Europe. It is a reason to feel confident in the strategy you already have. If you have been holding XEQT, your portfolio is benefiting from Europe’s recovery without you having to lift a finger. You did not need to:

• Read a single analyst report about European defence stocks
• Figure out how to buy shares on the London Stock Exchange or Euronext
• Decide what percentage of your portfolio should go to Europe
• Worry about euro/pound to Canadian dollar currency conversion
• Time when to get in and when to get out

All of that complexity was handled for you, inside a single ETF, for a management expense ratio of 0.20%.

And here is the part that I think is most important: the next rotation will work the same way. At some point, European outperformance will fade. Maybe US tech will stage another comeback. Maybe emerging markets will have their moment (they always do, eventually). Maybe a region nobody is talking about right now will be the big winner of 2028.

When that happens, your XEQT will be there too. Because it owns everything, everywhere, all at once.

10. The Lesson Is Diversification, Not Europe

I want to be careful here, because I have seen this movie before.

Right now, financial media is full of “Why You Should Invest in Europe” articles. Social media is full of people who suddenly discovered European stocks six months ago and are now positioning themselves as experts. There is a real risk of a new narrative taking hold: “Europe is the place to be.”

Do not fall for it. The lesson of 2025-2026 is not “Europe is better than the US.” The lesson is:

• Markets are unpredictable. The rotation from US to international happened faster than almost anyone expected.
• Valuation matters eventually. Cheap markets do not stay cheap forever, and expensive markets do not stay expensive forever.
• Diversification is not about maximizing returns in any single year. It is about ensuring you participate in wherever growth is happening, whenever it happens.
• The “boring” strategy wins over full cycles. The globally diversified investor who stayed the course through years of US dominance is now being rewarded – without having changed a thing.

I do not know if European stocks will keep outperforming for the rest of 2026. They might. They might not. A recession could hit the eurozone. The ECB could make a policy mistake. Geopolitics could shift in unpredictable ways. That is the nature of investing.

What I do know is that I will keep buying XEQT on my regular schedule, the same way I did when US stocks were dominating and my friends were laughing in the group chat. The strategy has not changed. The only thing that has changed is which part of my portfolio is carrying the load this year.

11. Final Thoughts: The Group Chat Update

Remember my university group chat? The one where I got teased for years about holding international stocks?

Last month, one of those friends – the loudest US-only advocate – sent a message that made my day. It was not an apology, exactly. It was more of an admission. He wrote: “Okay, I finally bought XEQT. I am tired of trying to guess what is going to work next.”

That is the whole point. Not that Europe is beating the US right now. Not that international stocks had a great year. The point is that trying to guess which region, sector, or country will win next is exhausting, stressful, and – for most of us – a losing game.

XEQT lets you stop guessing. You own Canada, the US, Europe, Japan, Australia, and dozens of emerging markets. Wherever growth shows up next, you are already there.

If you are just getting started with XEQT, check out my complete guide on what XEQT is and how it works. And if you are already holding it, the message is the same one it has always been: stay the course and keep buying.

The boring investors are having a very good year.