Milan's FTSE MIB index hit its highest since June 2008 on Thursday, two weeks after ratings agency Moody's lifted the country's debt outlook to stable. By 1204 GMT, it rose 0.4% on the day, bringing year-to-date gains to almost 26%.
The IBEX in Madrid scaled its highest since May 2018 after a rally of almost 23% in 2023. It was last up 0.3%.
Both Milan and Madrid equities have benefited from a heavy weighting towards bank stocks, which have enjoyed better profits and delivered stronger investor returns this year on the back of rising interest rates.
Traders, however, were wary of the risk of profit taking.
Giuseppe Sersale, fund manager at Anthilia in Milan, said equity markets in southern Europe have also been supported by cheap valuations and a relative strength of their economies, compared to Germany and other parts of Europe.
"Tactically, some profit taking is possible. In the medium term, we have to see how the economy goes. The starting point, though, is not as attractive as it was a year ago," Sersale said.
Moody's left the Italian rating at Baa3, one notch above junk, but upgraded the outlook to stable from negative, in an unexpected boost for Prime Minister Giorgia Meloni's government.
The ratings agency said the upgrade reflected a stabilisation of prospects for Italy's economic strength, the health of its banking sector and Rome's debt dynamics.
In Spain, the parliament voted to make Pedro Sanchez prime minister for another term earlier in November, ending a four-month deadlock after an inconclusive general election in July.
BANK TOP GAINERS
Italian banks have soared over 40% this year with UniCredit leading the way with a 89% surge.
Among Italy's top performers are also defence group Leonardo and luxury carmaker Ferrari, both up over 66% this year. Europe's STOXX 600 is up 8.6% in 2023.
Over in Spain, November's rally has brought the IBEX back above its pre-pandemic levels for the first time this week, after surpassing the key 10,000-point mark.
The index is still far below its all-time record of almost 16,000 points, set in November 2007.
"The big question now is whether this rally in such a short time is sustainable, which will depend on if the market expectations of an early rate cut will materialise or not," said Natalia Aguirre, analyst at Renta 4.
In late 2022, a wave of pessimism swept over the market when analysts saw a recession looming, both in Europe and in the United States, as rising interest rates were expected to damage the labour market and drag on the economy.
However, a sharp drop in inflation and the economy's unexpected resilience restored optimism among traders, who - after finding refuge in safe-haven assets such as the U.S. dollar and gold - have regained their appetite for equities.
Together with pharma company Rovi, lenders BBVA and Sabadell have risen the most so far this year, while Cellnex, Grifols and Solaria have been the top gainers in November.
(Reporting by Matteo Allievi and Danilo Masoni; Editing by Amanda Cooper and Krishna Chandra Eluri)
By Matteo Allievi and Danilo Masoni