European Construction Stocks Hit Record Highs on Stimulus Hopes, But Valuations Raise Questions
The sector is closing the year with a 21% gain, but analysts are now weighing the high price of optimism against future contract wins.
European construction stocks were among the top performers of 2025, driven by investor enthusiasm for Germany’s infrastructure stimulus, prospects for rebuilding Ukraine, and an AI-related building boom.
The STOXX construction index is closing the year up 21% at record levels, but questions are emerging about whether the momentum can continue or if a price consolidation is on the horizon.
Building materials companies Holcim and Heidelberg have led the charge, buoyed by optimism over cement pricing and infrastructure spending. Further support comes from signs of a housing market recovery, lower interest rates, and Germany’s €500 billion ($580 billion) infrastructure plan, which is expected to gain traction next year.
The sector could also see additional revenue from defense-related orders as governments increase spending to meet NATO targets, though large-scale projects are still years away.
“We see the green light for the restart of construction,” said Damien Mariette, a senior fund manager at CPR Asset Management, a subsidiary of Amundi. “The German plan is a positive catalyst and defense spending is the icing on the cake.”
A resolution in Ukraine could unlock a massive reconstruction effort and lower energy costs. Recovery needs could reach $524 billion over a decade, according to estimates cited by Kepler Cheuvreux.
However, the timing remains uncertain, and some investors warn that much of the optimism is already priced into stocks. There are also doubts about whether European firms, rather than U.S. competitors, will secure the largest contracts.
“A lot of the good news seems to have been anticipated. Without a broad recovery and real contract wins, further outperformance could be hard to justify,” said Andras Vig, a multi-asset strategist at Invesco, adding that the sector appears “quite overvalued.”
“Hope has largely driven the rally, but now we may need contracts to materialize,” Vig noted.
Europe’s construction sector now trades at about 17 times earnings, pushing its premium over the broader STOXX index to around 15%, up from 6% in January, according to LSEG Datastream.
Morgan Stanley does not expect major infrastructure awards in Germany until the second half of next year, with volume gains unlikely before 2027. This leaves “heavy-side” building materials companies like Holcim vulnerable to a downturn. The bank now favors companies positioned to benefit from a European housing market recovery, naming Saint-Gobain as its top pick over CRH, which it still sees benefiting from cement pricing and the Ukraine rebuild theme.
Tom O’Hara, director of European equities at GAM, said that stocks with greater exposure to housing markets are now trading at a discount to their “heavy-side” peers for the first time in years. “If we have good news on the housing recovery, this could be an interesting opportunity to catch up,” he said.
Despite the uncertainties, Kepler upgraded the sector to “overweight” this month. “A potential end to the conflict in Ukraine could be one of the sector’s next major catalysts, in addition to falling interest rates.”
