Some See a Renaissance for European Equities

Since the mid-2000s, Europe’s equity market has underperformed the U.S., but we may be at a turning point. Year to date through May 14, 2025, the MSCI Europe Index gained 17.3% in gross USD terms, far outpacing the -.3.5% return of the MSCI USA Index.  Currency effects, primarily due to the depreciation of the USD, accounted for roughly half of Europe’s outperformance. 

While a correction in the U.S.’s information-technology (IT) sector was the major contributor to the market-wide decline this year, every MSCI European sector index outperformed its U.S. counterpart, with communication services and financials leading the way.¹

Data from Dec. 29, 2000, to May 14, 2025. Gross returns are in USD. Europe is represented by the MSCI Europe Index and the U.S. by the MSCI USA Index. The European and U.S. sector indexes are represented by the respective MSCI sector index.

Rising fund flows into Europe in the early part of the year indicate renewed interest in European equities,² while interest and confidence in U.S. equities appeared to wane. As of mid-April, 36% of fund managers were net underweight U.S. equities, their most underweight allocation since May 2023.³

Despite the direct impact of U.S.-imposed tariffs, Europe appears to be somewhat insulated from higher costs and the potential damage to trade flows than other regions due to its lower economic exposure to the U.S. market.  

Only 24.5% of the revenues of the MSCI Europe Index’s constituents were U.S. sourced, compared to about 40% of revenues from international markets​ for the MSCI USA Index’s constituents. This asymmetric revenue exposure could position Europe more favorably, particularly given Europe’s stronger ties to faster-growing emerging markets. 

Data as of April 30, 2025. We used MSCI Economic Exposure data for this analysis.

The largest sectors in the MSCI Europe Index are financials, industrials and health care, which contrasts with the tech-heavy sector profile of the U.S.⁴ For much of the last decade, Europe’s more-defensive sector composition acted as a structural drag on its performance, but in the current environment, its sector mix may give it an edge. 

Of all European sectors, financials and utilities earn the least revenues from the U.S. and, therefore, face limited tariff risks. And although the European health-care sector has the highest exposure to the U.S., as of this writing the sector remains exempt from U.S. tariffs.

Industrials, the second-largest sector in the MSCI Europe Index at a 17.9% weight, compares to an 8.8% weight in the MSCI USA Index.  The sector appears to be well positioned to benefit from much of Europe’s fiscal pivot toward greater defense and infrastructure spending. For example, Germany’s landmark EUR 1 trillion spending initiative is a marked break from its tradition of fiscal restraint. Similar sentiments are shaping policy in the U.K. and France,  where investment in infrastructure, defense and green technologies have gained bipartisan support. Military expenditure as a share of GDP in developed Europe rose to 1.7% in 2023 from 1.5% in 2021, compared to the U.S.’s 3.5% in 2023.⁵

Data as of April 30, 2025. We used MSCI Economic Exposure data for this analysis.

Despite their recent outperformance, European equities remain deeply discounted compared to their U.S. counterparts, as has been the case since 2003. For example, the ratio of the 12-month forward price-to-earnings (P/E) ratio for the European and U.S. equity markets has trended below 0.9 since 2015 and was only at 0.67, on April 30, 2025. Europe also has an income advantage versus the U.S., holding a positive dividend-yield spread between 1.5% and 2.0% since March 31, 2022. The spread is near its widest point in decades. These metrics point to a valuation buffer and yield gap for European versus U.S. equities that may appeal to value-conscious and yield-oriented investors.

Europe’s market-level valuation discount partly reflects structural differences, such as a profitability gap that currently favors the U.S. and higher U.S. exposure to growth-oriented sectors like IT. The return-on-equity (ROE) spread has narrowed slightly in recent periods, and the relative PEG (P/E divided by earnings-per-share growth) ratio dipped below one in March 2025. These measures suggest that European equities may provide cheaper growth-adjusted valuations than U.S. equities with the moderation in U.S. growth expectations.⁶

Data from June 30, 2003, to April 30, 2025. Metrics are based on the MSCI Fundamental Data Methodology for the MSCI Europe Index relative to the MSCI USA Index.