Why European Stocks Are (or Aren’t) Undervalued Right Now
This analysis forms part of our coverage of European stocks and European Business News, and is updated alongside daily reporting in the European Business Magazine newsroom.
For much of the past decade, European equity markets have lagged behind their American counterparts. US technology giants powered soaring valuations, while Europe struggled with weak growth, fragmented regulation and persistent political uncertainty. Yet in 2025, a growing number of global investors are asking whether that pessimism has gone too far.
Valuations across Europe remain well below those of the United States, even though many European companies are highly profitable, globally competitive and deeply embedded in the world economy.
The valuation gap
On most measures, Europe looks cheap. Price-to-earnings ratios for major European indices are significantly lower than those in the US. Dividend yields are higher. Balance sheets, especially in sectors such as banking and industrials, are stronger than they have been in years.
Part of this reflects history. Europe’s financial crisis, followed by years of ultra-low interest rates and weak productivity, scarred investor confidence. But it also reflects structural differences. Europe has fewer high-growth technology champions and more mature industries, which investors typically value less generously.
The question is whether this discount still makes sense.
Banks are changing the picture
One of the most important shifts in Europe’s market is the resurgence of its banks. Higher interest rates have revived profitability, and tighter regulation has made the sector safer than at any time since the financial crisis.
As explored in our coverage of the European banking sector, lenders are earning more from interest margins, payments and fee-based services. They are also deeply involved in the private-credit and dealmaking boom that is reshaping European finance.
Because banks make up a large share of European indices, their improved earnings have a powerful impact on market valuations.
Dealmaking and capital flows
Europe’s corporate sector is also more active than it has been in years. Mergers, acquisitions and restructurings have surged, driven by the need to adapt to digitalisation, energy transition and geopolitical change.
The rebound in global dealmaking has lifted advisory revenues, boosted confidence and attracted international capital back to Europe.
At the same time, European markets have benefited from higher trading volumes, increased IPO activity and renewed interest from global investors looking for diversification away from the US.
What is holding Europe back
Despite these positives, Europe still faces serious structural challenges. Productivity growth remains weak. Regulation is fragmented across national borders. And the continent lacks the scale of capital markets enjoyed by the United States.
These issues, examined in our analysis of who killed Europe’s single market dream, limit the ability of European companies to grow quickly and efficiently.
They also mean that European firms are often acquired by foreign buyers before they can reach global scale — depriving markets of future champions.
Technology and the next growth wave
Another reason for Europe’s valuation discount is the dominance of US technology giants. While Europe has strong engineering, manufacturing and research, it has produced relatively few platform-scale digital companies.
That is beginning to change. Europe’s AI, cloud and semiconductor industries are growing rapidly, attracting investment and talent. Over time, these sectors could become major drivers of market value, reshaping how investors view European stocks.
Geopolitics cuts both ways
Geopolitical risk has long been a drag on European markets, from Brexit to the war in Ukraine. Yet it is also creating opportunities.
Rearmament, energy security and industrial policy are generating massive public and private investment. Defence, infrastructure and green technology companies are seeing strong order books and rising profits — a trend that is lifting entire sectors of the market.
What investors are really betting on
Ultimately, investing in Europe is a bet on whether the continent can turn crisis into renewal. If Europe uses the energy transition, technological change and geopolitical shocks to modernise its economy, today’s low valuations could look like a bargain.
If it fails, the discount will persist.
For now, the balance of evidence suggests that Europe is slowly, unevenly, but genuinely re-awakening.
The bottom line
European stocks remain cheaper than their global peers, but they are no longer the stagnant asset class many investors assume. Banks are stronger, dealmaking is back, and new industries are emerging.
For daily updates on how markets, companies and policy are shaping Europe’s investment landscape, follow European Business News and the European Business Magazine newsroom.
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