Europe's stocks stage a dramatic comeback—from forgotten to favoured

Europe's current attractiveness: Valuation and macro tailwinds

European equities currently trade at significant valuation discounts compared to the US, with forward price-to-earnings (P/E) multiples around 12x versus approximately 23x for the US market. Europe's average dividend yield near 3.3% substantially exceeds the US average of about 1.3%.

These appealing valuations align with Europe’s improving macroeconomic backdrop. Inflation nearing the ECB’s 2% target has allowed room for monetary easing, contrasting the wait-and-see stance of the US Federal Reserve. Moreover, institutional and retail investor sentiment is clearly shifting towards Europe, driven by improving fundamentals and a more favourable policy environment, further supporting the region’s equities.

"Europe’s equity revival isn’t just sentiment-driven; it’s underpinned by robust fundamentals, supportive monetary policy, and compelling valuations."

Historical context: Why Europe’s revival may prove durable

Unlike previous short-lived recoveries, Europe's current revival is supported by historically attractive valuations, proactive monetary policy, substantial fiscal stimulus, and notable capital shifts from the US to European markets. These structural factors suggest that Europe’s current equity market improvement is likely to be more sustainable, rather than fleeting.

"This time genuinely appears different for Europe, with structural factors aligning to underpin a durable equity market revival."

Navigating Europe's markets: Country deep dives

Germany: Fiscal transformation shaping future recovery

Germany’s economic outlook remains subdued, with near-zero growth expected in 2025 amid export weakness and geopolitical uncertainties. However, the recently announced EUR 500 billion infrastructure and modernisation programme marks a historic shift toward investment-driven growth. This substantial fiscal stimulus aims at modernising energy grids, boosting digital infrastructure, enhancing industrial automation, and increasing defence capabilities—potentially revitalising Germany’s medium-to-long-term prospects.

"Germany’s subdued short-term outlook may mask significant long-term upside driven by unprecedented fiscal stimulus."

Spain: A bright spot in the eurozone

Spain is expected to lead eurozone growth in 2025, forecasting approximately 2.4% GDP growth. Key drivers include a fully recovered tourism sector, effective use of EU recovery funds into infrastructure and green energy, and a strong banking sector benefiting from favourable interest rates. Spain’s dynamic growth presents investors with balanced opportunities for stable income and growth potential.

"Spain’s economy is distinguished by structural reforms and strategic EU investments, positioning it as a robust growth engine."

Italy: Gradual recovery with attractive valuations

Italy is experiencing modest but stable growth (0.5% in 2025), supported by fiscal responsibility and targeted EU-driven investments in infrastructure and renewable energy. Attractive valuations, particularly in financial services, utilities, and infrastructure, offer investors appealing opportunities. However, high public debt and productivity concerns remain key investor considerations requiring selectivity.

"Italy offers selective opportunities due to stabilised fiscal policy and targeted investments, balanced by longer-term structural challenges."

France: Global strengths amid domestic caution

France’s near-term growth is constrained (around 0.5% GDP forecast) by fiscal tightening and consumer caution. Nonetheless, its economy hosts globally dominant multinational corporations in luxury goods, aerospace, healthcare, and energy, offering stability and global exposure despite domestic economic uncertainties.

"France is characterised by robust global leaders amid a cautious domestic economic environment, requiring investor selectivity."

European sectors positioned for structural growth

Several sectors aligned with Europe’s strategic investment initiatives offer notable opportunities:

• Financials (banks): European banks have benefited from improved profitability due to recent higher interest rates, providing attractive dividend yields and valuations compared to global peers.
• Renewables and utilities: Europe’s ambitious energy transition goals underpin structural investments in renewable energy and modernised electricity grids, providing stable long-term growth opportunities.
• Defence and industrials: Rising European defence budgets amid ongoing geopolitical tensions provide long-term revenue visibility and growth potential for defence and industrial firms.
• Technology and digital infrastructure: The EU’s push for digital sovereignty supports structural demand in sectors such as semiconductor equipment, software solutions, and enterprise digitalisation.

"Europe’s investment landscape favours sectors directly benefiting from major policy-driven initiatives—particularly financials, renewables, technology and defence."

Leading European equities by country (Illustrative, not recommendations)

These examples illustrate prominent stocks in their respective markets, not specific investment recommendations.

Geopolitical and macroeconomic risks

Significant risks remain, primarily geopolitical tensions involving trade relations and ongoing tariff disputes. Investors should maintain discipline, diversified portfolios, and avoid reactionary decisions based on short-term volatility or headlines.

How investors can position now

• Portfolio review: Consider increasing allocations to European equities, given attractive valuations and supportive policy dynamics.
• Geographic balance: Prioritise Spain and Italy for immediate opportunities; Germany for medium-term upside; selectively focus on multinational corporations in France.
• Sector alignment: Favour sectors benefiting directly from structural investments (financials, defence, renewables, technology).
• Behavioural discipline: Remain calm, diversified, and patient during volatile market periods. Disciplined long-term investment consistently outperforms impulsive reactions.

"Europe’s current investment landscape demands disciplined diversification and selectivity to navigate promising opportunities amid global uncertainties."

A structurally supported revival in European equities

Europe’s equity revival offers meaningful potential for investors who approach the market thoughtfully, diversify strategically, and maintain disciplined investment practices. Amid shifting global dynamics, Europe's evolving landscape presents significant opportunities balanced by prudent caution. Investors attentive to valuations, sectoral opportunities, and geopolitical contexts are positioned to benefit from this structural and lasting equity revival.