Overview

European stock markets inched higher on Friday, September 12, 2025, as investor sentiment was lifted by growing expectations that the U.S. Federal Reserve will soon begin cutting interest rates. The pan-European STOXX 600 index posted a modest 0.1% gain, closing around 556 points, setting the tone for its first weekly gain in three weeks.

The rise in equities came despite global uncertainty and sector-specific volatility. Markets appear to be responding optimistically to softer-than-expected U.S. inflation data and weakening labor market indicators, which suggest a less hawkish stance from the Federal Reserve may be imminent. This macroeconomic backdrop helped support risk-on sentiment across key European indices.

Aerospace and Defence Lead Weekly Gains

The aerospace and defence sector emerged as the strongest performer of the week, rallying approximately 5.4%. This surge was partially driven by renewed geopolitical tensions in Eastern Europe. Reports surfaced that Poland intercepted and neutralized a possible Russian aerial threat, which amplified market interest in defence-related equities.

Investors have historically moved towards defence stocks during periods of rising geopolitical instability, viewing them as safer bets with strong government contract backing. Names like BAE Systems, Thales, and Leonardo recorded notable increases throughout the trading sessions.

This uptick reflects a broader market trend where sectors perceived as “defensive” or supported by government spending tend to outperform in times of macroeconomic and geopolitical uncertainty.

Healthcare Sector Weighs on Broader Gains

Not all sectors participated in the rally. The healthcare sector underperformed, with a decline of approximately 0.3% across the board. Novartis, a key component of the STOXX 600 healthcare index, fell by about 2% after Goldman Sachs downgraded the stock from “neutral” to “sell.”

The downgrade was based on mounting competition from generic drug manufacturers, especially in oncology and cardiovascular drug segments. Analysts expressed concerns about the company’s pipeline durability and potential revenue attrition in its high-margin portfolios.

Other healthcare stocks such as Sanofi and Roche also ended the session lower, contributing to the sector’s weak performance.

Investors Watch France Credit Rating Review

Another key focus for European investors was the upcoming sovereign credit rating decision for France by Fitch Ratings. Market participants are closely monitoring the situation amid growing concerns about France’s fiscal stability and political volatility.

The political environment in France remains turbulent, following the country’s appointment of its fifth prime minister in just two years. This rapid turnover in leadership has fueled speculation about policy consistency and fiscal governance.

Any potential downgrade could elevate France’s borrowing costs and weigh heavily on broader European sentiment, especially given France’s critical role in the Eurozone economy.

Monetary Policy Drives Market Narrative

The dominant theme across global markets remains the potential for monetary policy easing by the U.S. Federal Reserve. Following data that showed softening labor market conditions and tame core inflation, investors are increasingly pricing in a rate cut in the next Federal Open Market Committee (FOMC) meeting.

The European Central Bank (ECB) is also under pressure, although it has maintained a cautious tone. A shift in the Fed’s policy direction could influence global bond yields, currency flows, and risk appetite, especially in developed markets like Europe.

Market Outlook: A Balancing Act

As of Friday, the STOXX 600 is on track to post a weekly gain of nearly 1%, reversing the bearish sentiment seen in previous weeks. While optimism over interest rates and sectoral resilience (especially in defence and industrials) provides support, risks remain:

• Potential credit downgrades for major Eurozone economies

• Weakness in healthcare and consumer discretionary sectors

• Persistent geopolitical tensions

• Sluggish growth in key economies like Germany and France

Investors are likely to remain selective in the near term, favoring companies with strong fundamentals, geopolitical insulation, and exposure to defensive sectors.