European Equities: A Strategic Bet Amid Macroeconomic Rebalancing

The global equity landscape in 2025 is defined by a stark valuation dislocation between European and U.S. markets. European equities, as measured by the MSCI Europe Index, trade at a forward P/E of 13.2x, a full 40% discount to the S&P 500’s 22.2x multiple [4]. This gap, while narrower than historical extremes, remains compelling for investors seeking undervalued opportunities. The Euro Stoxx 50, a bellwether for continental markets, sits at 15x forward earnings—just above its 10-year average—suggesting a market that is neither overhyped nor entirely overlooked [3].

This dislocation is not arbitrary. It reflects a confluence of macroeconomic forces reshaping Europe’s economic trajectory. The European Union’s trade agreement with the U.S. in early 2025 has been a game-changer. Initially, European corporate earnings were projected to contract by 0.3%, but revised forecasts now point to 3.1% growth, driven by reduced tariff uncertainty and stabilized supply chains [6]. While trade tensions with Switzerland and delayed U.S. executive orders on tariff reductions persist, the broader narrative of economic normalization has buoyed corporate confidence. Companies like DHL and Continental have already signaled improved cost predictability, with Continental estimating a mid-double-digit euro net benefit from the deal [6].

Monetary policy divergence further amplifies the case for European equities. The European Central Bank (ECB) has maintained a more accommodative stance than the U.S. Federal Reserve, with interest rates still 150 basis points lower than their U.S. counterparts. This has supported European corporate borrowing costs and provided a tailwind for sectors like industrials and financials [6]. Meanwhile, Germany’s EUR 500 billion infrastructure and modernization program—targeting energy grids, digital infrastructure, and defense—signals a structural shift toward long-term growth [2]. Such fiscal stimulus, combined with rising EU-wide defense spending, creates a durable foundation for earnings resilience.

Earnings strength is also underpinned by Europe’s attractive dividend yields. At 3.3%, European equities offer a 200-basis-point advantage over U.S. counterparts [2]. This income premium, coupled with a weaker euro (which boosts export-driven earnings), makes European stocks particularly appealing in a low-yield global environment. JPMorgan’s Q2 2025 investment review noted a strategic reallocation toward European financials and communication services, as investors sought higher yields and growth potential amid U.S. market saturation [5].

The investment thesis is further strengthened by valuation metrics. Goldman Sachs projects a 6% upside for European equities over the next 12 months, citing improving earnings visibility and a narrowing discount to U.S. markets [3]. While risks remain—geopolitical tensions, energy price volatility, and uneven regional growth—the current discount appears to price in pessimism that may not materialize. For end-of-year positioning, European equities offer a rare combination of undervaluation, macroeconomic tailwinds, and earnings resilience.

Source:
[1] European exceptionalism: A new era for value investing? [https://www.mandg.com/investments/professional-investor/en-lu/insights/mandg-insights/latest-insights/2025/04/european-exceptionalism-a-new-era-for-value-investing]
[2] Rattled by tariffs? Four reasons to explore European stocks now [https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/ideas-and-insights/rattled-by-tariffs-four-reasons-to-explore-european-stocks-now]
[3] Why European stocks are outperforming the US [https://www.goldmansachs.com/insights/articles/why-european-stocks-are-outperforming-the-us]
[4] 2024 Review and 2025 Outlook: European equity [https://am.eu.rothschildandco.com/en/news/2024-review-and-2025-outlook-european-actions/]