"Buy Europe" Trade Fails to Materialize: Three CEFs to Hold Off On

European stocks are overvalued, with disappointing earnings growth compared to the US. The S&P 500 ETF is trailing the Vanguard European Stock Index Fund, making it a fund to avoid. Two closed-end funds with European exposure, BlackRock European Holdings (BGEAX) and BlackRock European Holdings II (BGEIX), have double-digit dividends but may face pressure due to the shift back to the US.

In recent weeks, the European stock market has shown signs of a notable upswing, with the pan-European STOXX Europe 600 Index climbing 2.11% on the back of robust corporate earnings and optimism surrounding geopolitical developments [1]. However, a closer examination reveals that European stocks may be overvalued, with disappointing earnings growth compared to the US. This has led to the S&P 500 ETF trailing the Vanguard European Stock Index Fund, making it a fund to avoid for investors seeking higher returns.

Despite the recent market rally, European stocks are trading at levels that may not reflect their true intrinsic value. For instance, BE Semiconductor Industries, a company that develops and manufactures semiconductor assembly equipment, is trading at €120.75, significantly below its estimated fair value of €154.51 [1]. Similarly, Jerónimo Martins SGPS, a leading food distribution and retail company, is trading at €20.96, below its estimated fair value of €28.77 [1].

The European market's underperformance can be attributed to several factors. Firstly, the European Central Bank's (ECB) monetary policy has been more accommodative than the Federal Reserve's, leading to a weaker euro and higher interest rates in the US. Secondly, the geopolitical developments in Europe, such as the Russian-Ukrainian conflict and the energy crisis, have created uncertainty and weighed on investor sentiment. Lastly, the European market's focus on cyclical sectors, such as automotive and aerospace, has made it more sensitive to global economic slowdowns.

In light of these challenges, investors should be cautious when considering European stocks. Closed-end funds with European exposure, such as BlackRock European Holdings (BGEAX) and BlackRock European Holdings II (BGEIX), may face pressure due to the shift back to the US. These funds have double-digit dividends, but their performance may be impacted by the broader market trends.

In conclusion, while the European stock market has shown signs of recovery, investors should remain vigilant about the overvaluation of European stocks and the potential for disappointing earnings growth. The S&P 500 ETF's underperformance relative to the Vanguard European Stock Index Fund serves as a cautionary tale for investors seeking higher returns.

References:
[1] https://finance.yahoo.com/news/3-european-stocks-estimated-21-053755446.html
[2] https://www.ainvest.com/news/equitable-holdings-q2-2025-navigating-key-contradictions-rila-spreads-capital-strategy-earnings-growth-2508/