Carolane De Palmas
5 min read
In This Article:
Just six months ago, betting on European stock markets over their American counterparts seemed almost unthinkable.
Following our previous article on the US equity market’s strengths and limitations, it’s now time to turn our attention to Europe as a compelling alternative for investors.
The European equity market is clearly attracting renewed interest. With improving macroeconomic conditions, increasingly discounted valuations, and a noticeable rise in institutional confidence, Europe is presenting compelling opportunities. However, structural challenges and geopolitical uncertainties remain.
European equities remain significantly less expensive than their U.S. counterparts. As of 2025, the Euro Stoxx 50 trades at approximately 15 times forward earnings, compared to over 20 times for the S&P 500. On a longer-term measure such as the CAPE (cyclically adjusted price-to-earnings) ratio, Europe is trading at only a 10% premium to its historical average, while the U.S. trades at a 30% premium. These more conservative valuations mean that European stocks might offer a better “safety net” for investors, as they’re not priced as aggressively.
What’s more, European companies tend to pay higher dividends – about 2% more than what you’d get from the S&P 500 in the U.S. This makes them particularly appealing if you’re an investor looking for regular income. Historically, European companies have favored giving cash back to shareholders through dividends, unlike many U.S. firms that often prefer stock buybacks to boost their earnings per share and investor confidence.
Following a period of economic disruption—mostly due to the Ukraine war and energy price shocks—many European economies are now stabilizing. Lower borrowing costs, a more supportive monetary environment, and fiscal initiatives, particularly in Germany, are helping fuel this recovery. The largest economy in Europe will focus on infrastructure investment with a €500 billion fiscal stimulus plan over the next 12 years.
Additionally, a growing consensus across Europe to increase defense spending—potentially to 3.5% of GDP in the coming years and at €800bn over the next four years according to the European Commission—signals a longer-term commitment to bolstering domestic demand and industrial capacity.
J.P. Morgan suggests that Europe’s improving economic situation could lead to its overall economy (GDP) growing by 1% to 1.5% next year. They also believe that the profits of companies listed on the Euro Stoxx (a major European stock index) could see mid-to-high single-digit growth in 2026 and 2027. This means that European company earnings might start to catch up with those in the U.S., closing the performance gap between the two regions.
