Europe's Surprising Breakout Market

Most investors are still fixated on Wall Street... But some are turning their attention overseas...

European stocks seem to be grabbing more headlines than in years past.

It's partly due to President Donald Trump, who's urging NATO to handle its own defense spending. Recent tariff threats from "Liberation Day" are contributing, too.

These trends have folks taking a closer look at popular foreign markets like Germany and the U.K. But while investors focus on the obvious options, another market has been outperforming them all...

Since bottoming out in 2022, Polish stocks have nearly tripled... eclipsing heavyweights like the German DAX Index, which is up just 18% this year.

In fact, Poland's stock market – as measured by the iShares MSCI Poland Fund (EPOL) – has soared more than 50% in 2025. It's now the best-performing exchange in Europe.

This comeback is the result of sweeping political change, robust stimulus, and Europe's most aggressive defense buildout.

So today, we'll take a closer look at what's going on in Poland... how it has emerged as Europe's equity outperformer... and why its defense and industrial sectors are especially ripe for investor attention.

Poland's equity market was stagnant for more than a decade...

EPOL, which tracks Poland's benchmark index, barely budged from 2010 to 2020. Even as the world reopened post-COVID-19, global capital flowed elsewhere.

That is, until a key political shift.

In late 2023, Poland ousted the populist Law and Justice (PiS) party from parliamentary control. And it ushered in a pro-business coalition government under Prime Minister Donald Tusk.

That reset helped unlock €21 billion in frozen European Union stimulus funds, withheld over democratic backsliding under the prior administration.

And the story didn't end there. Earlier this month, Karol Nawrocki – the PiS-backed conservative candidate – won the presidential election by a razor-thin margin. His victory restored veto power to the populist camp. It raised concerns about potential legislative gridlock and renewed clashes with Brussels.

Markets responded swiftly. Warsaw's main stock index slipped about 2% in the following days. It has completely stalled since.

This political tug-of-war may limit how fast Poland can access that €21 billion in EU stimulus. But it hasn't derailed the country's industrial and defense transformation...

Poland is fast becoming key support for Europe's military backbone...

After Russia invaded Ukraine, Poland committed to spending 4.7% of GDP on defense by 2025... the highest among NATO allies. That's more than double the 2.2% it spent in 2022.

Much of that budget went abroad at first, replacing gear sent to Ukraine. But the situation is changing fast.

The Polish government now requires at least 50% of its modernization budget to go to domestic manufacturers. Local defense contractors are growing and gaining pricing power as they ramp up military output.

They're also benefiting from another tailwind... in another country.

An article in The Economist explains that German growth translates almost one-for-one across the Polish border. It translates to higher demand for Polish exports, including capital goods and military gear.  

Said another way, as Germany boosts its own defense and infrastructure budgets, it's creating fresh demand for Polish capital goods and military-grade exports.

The result is a manufacturing boom – with a defense kicker.

But the market just doesn't care about what's happening in Poland...

Despite this powerful macro story, the country remains deeply undervalued by global investors.

We can see this through our aggregate Embedded Expectations Analysis ("EEA") framework...

We start with the average stock price of all companies in Poland. From there, we can calculate what the market expects from the company's future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well the Polish stocks have to perform in the future to be worth what the market is paying for them today.

This market has been on something of a roller-coaster ride. Polish companies averaged a Uniform return on assets ("ROA") around 4% before 2020. Then Russia invaded Ukraine, leading to sanctions on Russian oil.

Poland's biggest nonfinancial company – an energy giant called Orlen – raked in cash as Europe looked elsewhere for power. That helped boost the entire market's returns to 10% by 2022.

Election uncertainty (and some one-off earnings declines) plunged returns to 2% last year. With the election in the past, returns should start to claw their way back.

That's not what investors expect, though. They're treating Polish stocks as though Uniform ROA will stay at just 2% through 2029.

Take a look...

Poland is a high-income, investment-grade economy undergoing a defense-fueled industrial surge. But the market is still pricing it like an underperformer.

Investors are ignoring a huge opportunity overseas...

As capital rotates out of overbought U.S. names and into overlooked markets, Poland stands out as a prime beneficiary.

Its defense and industrial sectors are leveraged to long-term European security trends. On top of that, cheap valuations give investors a rare combination of growth and value.

In short, Poland is positioned for the next wave of European upside... and the market isn't paying attention.

Joel Litman
June 30, 2025