In a year that’s all about Europe, there’s one key market missing out on all the investor love: France.

The aftermath of President Emmanuel Macron’s surprise decision last June to hold elections is still being felt in French assets. For stocks, the picture is made worse by anemic demand for French luxury goods from previously high-spending Chinese shoppers. 

The CAC 40 in Paris is up 4.1% this year. Meanwhile, Germany’s DAX has rallied 18% and is set for its best first-half since 2007. Historic fiscal stimulus is revitalizing Europe’s growth engine, spurring frenetic rallies in defense and infrastructure stocks in Frankfurt. 

Bank of America Corp.’s survey of European fund managers this week showed that these investors are turning more bullish on the region’s stocks. Europe’s Stoxx 600 benchmark is up 7% so far in 2025. But, among countries, Germany is the most liked and France “the most unloved.”

The snap vote last June left France with a hung parliament and political instability that hobbled efforts to reduce the budget deficit to European Union limits. In the government bond market, France has sharply underperformed Germany as investors demand higher compensation to account for the risks. 

For Florian Allain, a fund manager at Mandarine Gestion in Paris, the concerns about France that trouble investors continue to grow. 

“In the past year, none of France’s biggest problems have been tackled. The state of public finances is dire, economic growth is weak and there’s no political visibility,” he said. “I have no problem understanding why a foreign investor wanting to buy Europe would rather chose Germany.” 

Not only have French large-cap stocks underperformed sharply since Macron called the snap election, they have also lost the valuation premium to their German peers they enjoyed for about a decade. The CAC 40 forward price-to-earnings ratio now shows an 8% discount to the DAX, compared with an average 6% premium during the 10 years prior to the election. 

And analysts are increasingly cautious about the outlook for the country’s most valuable companies. Since the start of 2024, CAC 40 earnings estimates have fallen by more than 10%, a sharp contrast with the 5% surge for the DAX and 2% increase for the broader Stoxx Europe 600. 

For a time, betting on France had proved a successful trade as Macron built a reputation among foreign investors as a pro-business reformer and well-heeled shoppers’ desire for French luxury goods grew year after year. Total returns for the CAC 40 between mid-2017, when Macron took office, and June 2024 totaled 83% against 68% for the pan-European Stoxx 600.  

Since Macron dissolved the French National Assembly, the CAC 40 index has slipped 4%. The DAX in Frankfurt is up 26%. Europe’s Stoxx 600 benchmark has gained 3.6%. 

The spectacular slump in French luxury stocks has left deep scars on the Paris stock market. Luxury giant LVMH has slumped 36% since last summer’s political turmoil erupted. That chopped more than 300 points off the CAC 40, almost three times more than car-maker Stellantis NV, the next biggest drag.

French stocks now lag far behind those in Spain, with the IBEX up 22% over the same period. In Italy, Milan’s FTSE MIB Index has climbed 14%. 

France’s bonds have underperformed those of neighboring Germany too. Since Macron called the election, yields on French 30-year bonds have surged by nearly half a percentage point while the equivalent rate on German bunds is little changed. At the 10-year point, French yields are 18 basis points higher, compared to six basis points lower in the case of Germany. 

“There’s no real going back for France, in terms of getting back to the spreads it used to trade at before,” said John Taylor, head of European fixed income and director of global multi-sector at AllianceBernstein, which manages assets of $785 billion. But the longer it lacks a clear governing majority, the harder it will be for country’s debt trajectory and fiscal dynamics to improve, he said. 

The divergence in performance is all the more remarkable given the newly elected government in Berlin’s announcement of a vast fiscal package in March to turbocharge long-term investment in defense and infrastructure. German bonds initially plunged on the prospect of much higher bond issuance in the coming years, though yields have since retreated from the peaks. 

It’s drawn a line under the years when French government debt was considered a good, high-quality alternative to German debt, the region’s haven asset due to Berlin’s historic fiscal austerity. The notes have also underperformed bonds issued by Italy, Spain and Portugal, once at the heart of the region’s sovereign debt crisis in 2011.

While France’s budget deficit had been deteriorating for years, the snap elections led to a highly fragmented parliament that laid bare the high barriers to curb public spending. Prime Minister Francois Bayrou is planning to present his government’s 2026 budget plans next month, which entail about €40 billion ($46 billion) of savings. 

“If Bayrou pulls off the 2026 budget, then I’d go bullish on France,” said Arnaud Girod, head of economics and cross-asset strategy at Kepler Cheuvreux in Paris. Still, he said that this move would be a tactical one as political risk would make a comeback sooner rather than later.

This story was originally featured on Fortune.com

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