European stocks have been on a bull run this year, with investors looking to diversify beyond the U.S. amid volatility sparked by President Donald Trump’s trade policies. But the region’s outperformance over the U.S. has narrowed over recent weeks, with Wall Street’s major averages recovering from the so-called “Sell America” trade to touch fresh all-time highs . At the same time, there has been a shift among Europe’s major bourses. In the spring, headlines were dominated by Germany’s stock market, which rallied as investors cheered what became known as Germany’s “fiscal bazooka.” While American equities sold off, the DAX — Germany’s benchmark index — surged. .GDAXI YTD line DAX index However, its outperformance against the U.S. has narrowed over the course of the year, with the index shedding 0.1% over the three months to September. The U.K.’s FTSE 100 , however, gained 6.7%, marking the London index’s best quarter since the end of 2022, and its second-best quarter in five years. On Wednesday, the index hit a record high. ‘Spectacular’ quarter for U.K.’s FTSE 100 According to Mark Preskett, senior portfolio manager at Morningstar Wealth, there’s more upside ahead for the FTSE 100. “The Q3 U.K. market rebound has been spectacular, catching many investors by surprise,” he told CNBC in an email. “We continue to view U.K. stocks as undervalued in aggregate and see sterling as trading below its fair value. This leads us to carry an overweight to U.K. equities in our multi-asset portfolios.” Michael Field, Morningstar’s chief equity strategist, added that the U.K. market was trading at around a 7% discount to what his team believes it’s worth. In comparison, Morningstar sees the general European market trading at a 3% discount to its potential value. “This may not seem like a huge difference, but for investors looking for opportunities at the margin, it makes all the difference,” Field said. “The U.K. has one of the most stable governments in the Western world, an advantageous tariff deal with the U.S., and the potential to cut interest rates materially over the next 12 months.” Many of the U.K.’s biggest stocks were among the best-performing names on the pan-European Stoxx 600 index in the third quarter. Mining firms Fresnillo and Antofagasta gained 63.9% and 52%, respectively, in the quarter, while oil shipping giant Frontline surged 38.9%. Morningstar’s Field added that although there is further upside for German stocks, they look less attractive than their U.K. counterparts from a valuation perspective. “The fanfare and momentum that accompanied the announcement of the German infrastructure fund is fading,” Field said. “Investors had expected swifter deployment of the funds and have become impatient. We believe it will happen at some stage and the effect on the region will be significant, but it will likely be next year before we see anything come through.” That shift in sentiment is being seen among investors both inside and outside of Germany, according to German lender Deutsche Bank. “It is clear from our client conversations that the enthusiasm about Germany’s historic fiscal reforms has evaporated over the summer,” Deutsche Bank Research analysts said in a note earlier this month. “We believe the sugar rush is coming and likely to boost cyclical growth for a while. Yet the long-term growth implications look dimmer than in the spring.” ‘Interesting waters to fish in’ Toni Meadows, head of investment at BRI Wealth Management, told CNBC that European equities were also facing another headwind in the form of an unusually strong currency. “As we compare Europe directly to the U.K., the earnings expectations of the former have struggled recently as the strength of the euro weighs on forecasts,” he said. “A stronger currency would reduce the value of overseas profits for the continent’s large, export-focused companies.” Since the beginning of the year, the euro has appreciated 13.5% against the greenback. “The outlook for economic growth in both regions is subdued but the FTSE 100 generates around 80% of revenues from abroad and so the index is insulated to an extent,” Meadows added. “As we look into 2026 there is less consensus around the pace of earnings growth in Europe versus a solid expectation of 10% EPS growth from U.K. large cap. The latter is also attracting attention after years of neglect from investors with some favoring the more value biased nature of the index.” Ben Needham, who manages a U.K. portfolio at global investment management firm Ninety One, told CNBC he believes the British market currently looks more exciting than it has in decades. “The good parts our index, from a valuation perspective, are the most interesting they have been for a very long time,” he said. “Since the [2008 financial crisis] that valuation support has never been stronger in our in our opinion. From a quality perspective, if that’s your investment style, it’s very interesting waters to fish in.” One London-listed stock Needham is particularly interested in is drinks maker Diageo . “The valuation’s unprecedented outside of the Great Financial Crisis, there’s been a supernormal cycle in regard to alcohol consumption,” he explained. “What’s happening now is that that’s rebased, the consumer is a little bit weak because of lagged effects of inflation and high interest rates, which at some point should correct.” Diageo — which has come under pressure amid declining sales, leadership shakeups and uncertainty arising from U.S. tariffs — makes drinks brands including Guinness, Johnnie Walker and Captain Morgan. Since the beginning of the year, however, its shares have surged more than 22% as investors bet on the company’s turnaround strategy . “There is [now] a plan B within the company, we don’t think they’re hoping for the best anymore, we think they’re preparing for the worst,” Ninety One’s Needham told CNBC. “So they are actually going to cut costs if they need to, they’ll cut strategic inventory if they need to. And some corners of the of the of the portfolio are doing very well, like Guinness.” ‘Rent, don’t own’ Europe While many asset managers still see upside ahead in Europe , Nick Giorgi, chief equity strategist at Montreal-based Alpine Macro, told CNBC he believes investors ought to take a cautious approach to the region’s markets. “Our view on European equities is that it’s a market to ‘rent but not own,’ meaning that there are secular and structural headwinds which ensure that the region is likely to underperform faster [versus] more dynamic markets such as the U.S. and even parts of emerging markets such as India or China,” he explained. “With that said, there are times and conditions when investors may want to ‘rent’ European or U.K. equities,” he said, citing a weaker dollar, a cyclical macroeconomic upturn or a boost from fiscal monetary policy. “These conditions were supportive in February and March,” he added. “However, my view is that the tailwinds are much less powerful today and a lot of European-based investors that shifted away from U.S. equities in the Spring … will eventually pivot back.”