European companies just had their best earnings season in years. Investors are starting to notice. The old advice to Americans was to vacation in Europe but never invest there. That is looking outdated. Investor skepticism toward the continent has meant the region's outperformers often fly under the radar.

For instance, total shareholder returns including dividends at European banks have beaten the Magnificent Seven over the last four years. Europe just had its best reporting season in years. Companies in the benchmark Stoxx Europe 600 index boosted earnings per share by 18% on average in the second quarter compared with a year earlier.

Growth is now widening beyond a narrow group of AI and bank stocks, according to Gerry Fowler, who leads the European equity strategy team at UBS. Government spending and private investment in priorities like infrastructure, energy security and defense are creating real opportunities. The Stoxx Europe 600 is up 10% so far this year, a bit less than the S&P 500's 12% gain.

European stocks have underperformed the U.S. since the mid-2000s, but the gap has narrowed lately. Another reason why Europe's performance is improving is that laggards no longer have as much sway on the stock market. Carmakers and manufacturers of auto parts are getting battered by competition from China, but they now make up less than 2% of the Stoxx Europe 600's weighting.