Europe is in the midst of some longer term changes that I believe may have positive implications for investors who are willing to think long term and, at times, swim against the tide.
The Trump administration is reorienting trade and economic policy, and as a result the Americans are looking more inwardly and more toward Asia. Europe must take more control of its defence and security and improve its competitiveness. Issues such as supply chain security, semiconductor availability and energy pricing are coming into focus more.
There’s a growing recognition in Europe that decisive action is needed - a development I view as highly significant. The resulting political shifts are already evident; for instance, Germany’s decision to relax its “debt brake” demonstrates greater fiscal flexibility. The government’s planned investment program, worth several hundred billion euros1 is good news for European equities, in my view.
A turning point?
Over the past 15 years, there has been a significant shift by European investors out of domestic equities and into U.S. equities — a trend that, in my view, may now be reaching a turning point. In 2009, Europeans held just over 15% of their equity investments in U.S. stocks; today, that figure stands at almost 45%. Meanwhile, their holdings in European shares have declined from more than 45% to about 30% over the same period.2
We would question whether such pronounced positioning in U.S. equities is sustainable. In conversations we’ve had with pension funds and asset managers around the world, many acknowledge that, given the current backdrop, it may be time to reweight their portfolios. These shifts tend to unfold gradually, but once large asset managers make such strategic changes, they typically maintain them for many years.
Some major advantages
Europe has several major advantages, in my view: Savings rates are roughly three times higher than in the U.S., and in many countries both private and public debt levels remain moderate - France being a notable exception for now. This creates substantial capacity to channel financial resources into productive investment.
Consumption trends in Europe have been holding up better than in the US or China, growing slightly. In addition, most European countries benefit from strong education systems that support long-term competitiveness. Over the past three years, European corporate earnings, measured in U.S. dollars, have broadly matched those of their American counterparts. While European earnings tend to be more cyclical - alternating between periods of stronger and weaker growth - the region’s banking sector has returned to robust health. Against this backdrop, the argument that U.S. equities offer clearly superior growth potential has become less convincing.
Then there’s valuation: European shares are trading at around 17 times earnings on a cyclically adjusted basis versus around 31 times for US shares, as the chart below shows. We also note that corporate profitability in the US, in the form of Return on Equity (ROE), has reached historically high levels. While part of this has been driven by the technology sector, it is worth questioning whether such returns can continue to rise. Many of our global businesses generate significantly higher margins in the U.S., largely due to market concentration. While we aren’t suggesting this will change dramatically, such elevated profitability could attract greater competition over time. Even within the technology sector, companies are committing substantial capital expenditure to areas such as data centres, which could also temper further growth in ROE.
US equity valuations remain close to historic highs
US corporate profitability also near peak amid trade war challenges
Cyclically Adjusted PE–US vs. Europe
US market trades at the 85th percentile of its 50 year history. Europe trades at the long-term average
Return on Equity (ROE) – US vs. Europe
Past performance is not a guide to future performance. Source: (top) - Goldman Sachs Investment Research, as at 05.04.25; (bottom) Morgan Stanley, MSCI
Of course, there are challenges for Europe. Competitiveness is a key issue - lower innovation versus the US - and overregulation. We believe regulations at the EU level may need to be revisited -- for example in energy and technology, there are many proposed regulations that are difficult or even impossible to implement in practice.
Electricity and natural gas are many times more expensive in Europe, especially in the UK and Germany, than in the US. This is a burden, especially for countries with strong industrial bases. It is hard to remain competitive when energy prices are three or four times higher.
Staying flexible
We think today’s market underscores the importance of style flexibility. Growth stocks outperformed value during the years of zero interest rates and dollar strength, but the landscape has shifted with rate normalisation and a softer dollar. Banks, for instance, have recently been a key sector to own, while many expensive “quality growth” companies have undergone significant de-ratings. It is essential, in our view, to adopt an investment approach that avoids being confined to the growth-versus-value divide.
As European equity investors, our team of Chris Legg, Christopher Sellers, Caroline Cantor and I, take a flexible, bottom up, high conviction and highly active approach. We look for companies that are the best at employing capital and generating the highest returns. This leaves us with a group of businesses that are above-average in terms of profitability - regardless of whether they are traditionally growth or value stocks.
Powering up, going digital
We’ve already highlighted European banking shares, but we also see good opportunities in areas such as technology and electrification. Within electrification, a range of European companies are positioned to benefit from powerful long-term trends -- including the expansion of power grids, rising and increasingly complex electricity demand and the growth of renewable energy.
Europe is home to key businesses in the digital transformation: semiconductor manufacturers and capital equipment companies that, like their U.S. counterparts, are exposed to themes such as artificial intelligence, client computing, and electric vehicles. Yet, valuations remain far more attractive than those of the U.S. “Magnificent Seven” tech stocks.
Finally, Europe’s regional diversity deserves emphasis. Southern Europe is emerging from nearly two decades of deleveraging, with low consumer debt and a healthy banking sector supportive of renewed expansion. The Nordic economies are also performing well, in some cases benefiting from competitive energy costs - a feature shared by Spain.
I would expect the US to remain the dominant global economy due to its inherent strengths in technological innovation, energy independence and low regulation, but I think European equities have been overlooked for too long. Europe has world-class businesses in many sectors, often trading at a discount to US peers. I believe the structural shifts now underway in the region around trade, capital allocation and government policy can make these companies even more compelling for investors.
Strategy risks
- Currency (FX) Risk - The strategy can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
- Share Class Hedging Risk - The share class hedging process can cause the value of investments to fall due to market movements, rebalancing considerations and, in extreme circumstances, default by the counterparty providing the hedging contract.
- Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Market Concentration Risk (Geographical Region/Country) - Investing in a particular country or geographic region can cause the value of this investment to rise or fall more relative to investments whose focus is spread more globally in nature.
- Derivative risk - the strategy may use derivatives to reduce costs and/or the overall risk of the strategy (this is also known as Efficient Portfolio Management or "EPM"). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the strategy.
- Liquidity Risk (general) - During difficult market conditions there may not be enough investors to buy and sell certain investments. This may have an impact on the value of the strategy.
- Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the strategy’s assets.
Footnotes
1Reuters article on German budget. 09.23.25. https://www.reuters.com/markets/rates-bonds/what-is-included-germanys-2026-draft-budget-2025-09-23/
2European holdings data: Goldman Sachs Investment Research, Datastream, as at end of Q2 2025.
The value of active minds: independent thinking
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