European construction stocks have been among the standout performers in 2025, fueled by investor enthusiasm over Germany’s infrastructure stimulus, hopes for Ukraine’s reconstruction, and the growing AI-related construction boom. However, analysts caution that the sector’s rich valuations may limit further upside without tangible contract wins.

Record Gains in European Construction

The STOXX Construction Sector Index (SXOP) is ending the year up 21%, reaching record levels. Leading the charge are building materials firms Holcim (HOLN.S) and Heidelberg (HEIG.DE), supported by optimism around cement pricing and anticipated infrastructure spending in Germany.

Damien Mariette, Senior Fund Manager at CPR Asset Management, a subsidiary of Amundi, said:

“We are seeing green lights for a construction restart. The German plan is a positive catalyst and defence spending is the cherry on the cake.”

Optimism Driven by Infrastructure and Defense Spending

Germany’s €500 billion ($580 billion) infrastructure plan and signs of a housing market recovery are key drivers of investor optimism. Additionally, defense-linked orders to meet NATO spending targets could provide supplementary revenue, though large-scale projects remain years away.

Peace and reconstruction efforts in Ukraine could unlock as much as $524 billion in demand over the next decade, according to Kepler Cheuvreux, while falling energy costs would further support the sector.

Valuations Signal Caution

Despite strong gains, some analysts warn that much of the optimism is already priced in. The sector now trades at about 17 times earnings, representing a 15% premium over the broader STOXX index, up from 6% in January.

Andras Vig, Multi-Asset Strategist at Invesco, noted:

“Hope has largely driven the rally, but now we may need contracts to materialize. Without broad-based recovery, further outperformance could be difficult to justify.”

Shifting Focus to Residential Market Recovery

Morgan Stanley expects significant German infrastructure awards to materialize only in the second half of 2026, with volume gains unlikely before 2027. This timeline leaves “heavy-side” materials firms like Holcim exposed to potential pullbacks.

Analysts now favor companies positioned to benefit from a residential market recovery, with Saint-Gobain (SGOB.PA) emerging as a top pick, replacing CRH (CRH.N), which still benefits from cement pricing and Ukraine reconstruction themes.

Tom O’Hara, European Equities Director at GAM, highlighted that stocks tied to residential markets are now trading at a discount to heavy-side names for the first time in years, presenting a potential catch-up opportunity if positive residential news emerges.

Analyst Upgrades and Outlook

Kepler Cheuvreux recently upgraded the sector to overweight, citing the potential end of the Ukraine conflict and falling interest rates as catalysts for further gains. Despite uncertainties, analysts find it difficult to be outright bearish on European construction stocks heading into 2026.