Welcome back to our latest edition of Market Insights with Sanjeev Kaushik.
In this edition, we look at whether Europe is finally ready to shine again. After a strong start to the year, markets have slowed and earnings are being revised down. But under the surface, opportunities are building.
We’ll break down what’s driving Europe’s market, the sectors to watch, and what it all means for investors.
1. Where Europe’s Markets Go Next
For years, investors have overlooked Europe. Money has flowed into the United States and into Asia, while European stocks were seen as “slow growth” or “old economy.”
But 2025 is shaping up differently. The European market has gone from a strong start, to a mid-year pause, and now it’s entering a moment where select opportunities could deliver attractive returns.
Let’s uncover what’s driving the European markets, which sectors matter most, and how you can think about positioning your investments.
1.1 Why Europe, Why Now?
Europe’s rally has been fueled by higher valuations, but from here, only modest gains are expected.
The year started with momentum. European equities were cheap, under-owned, and boosted by government spending plans in Germany and elsewhere. This helped indices like the STOXX Europe 600 (SXXP) rally hard.
But since March, things have gone quiet. Earnings have disappointed, the euro is rising, and global headlines around tariffs and slower growth are weighing on sentiment.
So, where do we stand today?
- STOXX 600 (SXXP): Expected to deliver about 5% price return and 8% total return (including dividends) over the next year.
- FTSE 100 (UKX): Forecasts suggest modest gains, with energy prices being a drag.
- Euro Stoxx 50 (SX5E): Europe’s blue-chip index is expected to grind higher, supported by stronger domestic growth in 2026.
1.2 Are European Stocks Cheap or Expensive?
At first glance, European equities do not look especially cheap. The price-to-earnings (P/E) ratio is at 14.4x, placing it in the top 30% of historical readings. By past standards, that makes stocks look somewhat pricey.
But context matters. Against bonds or high-yield debt, equities remain reasonable. And compared with U.S. stocks (SPX), Europe still trades at a clear discount. Even after adjusting for sector differences, like the larger tech weighting in the U.S., European shares look more attractively valued. In short, Europe is not a screaming bargain, but it does offer better relative value than the U.S.
Despite this, investor positioning is still light. European equities have been out of favor for more than a decade as money flowed into the U.S., especially tech. Currently, European investors hold over 40% of their equity portfolios in U.S. stocks, up sharply from just 15% in 2009.
While flows have begun to return to Europe in 2025, they remain small compared to the massive outflows seen from 2022–2024.
1.3 Earnings Outlook: Why Estimates Are Falling
The earnings season in 2025 was not terrible, but expectations for the full year and 2026 have been revised lower. The big reason? Currencies.
- The euro (EUR/USD) is forecast to rise to 1.25 in the next 12 months.
- Every 10% rise in the euro knocks 2–3% off earnings for European exporters.
- Companies most exposed to the U.S. (exports, sales, supply chains) have seen the sharpest downgrades.
Domestic-focused companies, however, are holding up much better.
1.4 Opportunities in European Equities
Even after a strong rally this year, European equities continue to present attractive entry points across select sectors. Below we break down the key areas investors should keep an eye on.
1.4.1 Banking
Banks have been among the strongest performers in 2025, with the sector up nearly 50% year-to-date. Despite this rally, the investment case remains solid. Valuations are still inexpensive relative to history, earnings are tied to Europe’s improving growth outlook, and balance sheets are stronger than in past cycles.
Shareholder returns are also a draw, with dividends and buybacks yielding about 9%, second only to energy. Large banks such as BNP Paribas (BNP.PA), Santander (SAN.MC), and Deutsche Bank (DBK.DE) remain attractive plays.
1.4.2 Fiscal Spending
European governments are committing to higher spending on infrastructure and defence, which is expected to drive multi-year growth. This creates opportunities in renewables, construction, industrial machinery, telecom, and defence equipment. Companies positioned to benefit include Siemens (SIE.DE), Vinci (DG.PA), E.ON (EOAN.DE), and BAE Systems (BA.L).
1.4.3 Small & Mid-Caps
Unlike in the U.S., small and mid-cap companies in Europe have outperformed this year. Several factors are working in their favour: improving growth expectations for 2026, increased M&A activity, and resilience against euro strength.
For investors seeking diversified exposure, ETFs like the iShares STOXX Europe Small 200 (XXSC.DE) offer a straightforward route.
1.4.4 Oil Price Weakness Shifts the Balance
Analysts expect Brent crude to fall into the low $50s by late 2026. If that happens, energy stocks could underperform while retailers and consumer discretionary companies benefit from stronger household spending power. Key names to watch include Inditex (ITX.MC), H&M (HM-B.ST), and Carrefour (CA.PA).
