Investing & Markets

Looking East: Why American Investors Should Consider European Markets in 2025

By TheAppNote•19.04.2025•8 min read

Introduction: The Valuation Gap

If you've been laser-focused on U.S. stocks over the past decade, you're not alone. American markets have dominated global returns for years. But something interesting is happening across the Atlantic that smart investors should pay attention to.

European equities entered 2025 trading at their deepest discount in two decades relative to U.S. stocks, according to MoneyWeek. By late 2024, European equities were valued at only about 60% of their American counterparts, compared to a 20-year median of approximately 80% (MoneyWeek, Dec 2024).

This valuation gap isn't limited to a few sectors. According to J.P. Morgan Asset Management, "every European sector" is now valued well below its U.S. counterpart, suggesting investors have perhaps grown overly pessimistic on European companies' prospects (J.P. Morgan Asset Management, 2025).

So what's driving this change, and how can you, as an American investor, potentially benefit? Let's dive in.

Source: MoneyWeek - Is there value in European equities?

The Tide is Turning: Europe's Market Momentum

After years of lagging behind, European markets have shown surprising strength in early 2025. According to Morningstar, European stocks surged by 9% by mid-March 2025, while U.S. equities declined by 8% during the same period (Morningstar, Mar 2025).

This performance shift has caught the attention of global investors. A Bank of America fund manager survey reported in February 2025 highlighted a dramatic shift in sentiment, with 76% of surveyed managers anticipating further upside for Europe in the coming year. For the first time in months, a majority even believed Europe would be the best-performing market globally in 2025 (Euronews, Feb 2025).

What's behind this newfound optimism? Several key factors:

Improving economic policies: Unlike the Fed, the ECB signaled easier monetary policy, with European interest rates at 2.5% versus 4.5% in the U.S. (Morningstar, Q2 2025)
Fiscal stimulus: Germany unveiled a "radical" €500 billion infrastructure spending plan, ending years of austerity to spur growth (Morningstar, Mar 2025)
Inflation control: European inflation dropped to 2.2%, supporting a more favorable interest rate environment (Morningstar, Q2 2025)

Goldman Sachs Research notes that Europe's strong start to 2025 is particularly impressive given that only 8% of investors expected the region to lead global markets this year. Even after a 10-12% jump in European equities, valuation gaps remain sizable, suggesting there may be more room to run (Goldman Sachs, Jan 2025).

Source: Morningstar - Stock Investors Start to Shift Money from the US to Europe

Undervalued Sectors Worth Your Attention

Renewable Energy: Deep Value in Europe's Green Transition

European renewable energy companies have been hit hard by trade tariffs and rising financing costs, making the sector deeply out of favor. However, Morningstar suggests this pessimism appears overdone. For example, Denmark's Ørsted, a wind energy giant, saw its shares drop about 15% year-to-date to a level approximately 40% under Morningstar's fair value estimate (Morningstar, Apr 2025).

With Europe's clean power transition accelerating as a matter of energy "sovereignty" and interest rates likely to ease, the thesis for a rebound in Europe's renewable sector looks compelling. For American investors seeking exposure, the iShares Global Clean Energy ETF (ICLN) offers a convenient way to access European clean-power leaders.

Luxury Goods: Premium Brands at Discount Prices

Several top European luxury stocks slid into bargain territory after a challenging 2023-2024 period. For instance, France's Kering (owner of Gucci) plunged about 17% year-to-date and trades around €195 – less than half of Morningstar's fair value estimate of €448. Similarly, UK-based Burberry was trading at approximately 40% below its estimated fair value (Morningstar, late 2024).

These luxury brands still enjoy strong pricing power and global consumer demand, suggesting potential for outperformance as sales recover. American investors can gain exposure through the Roundhill S&P Global Luxury ETF (LUXX), which is heavily weighted toward European luxury icons.

Industrial Innovation: Europe's Hidden Strength

Despite recession fears, many European industrial companies have been outperforming broader markets. An index of European industrial goods firms beat the MSCI Europe index by approximately 6.8 percentage points annually since 2014, including a remarkable 15.7% outperformance in 2023 alone (Oliver Wyman, Sept 2024).

This growth favors innovative niches like defense equipment, power generation & electrification, and semiconductor machinery. For example, Dutch chip-tool maker ASML added nearly 2% to sector growth on its own. The ROBO Global Robotics & Automation ETF (ROBO) offers Americans targeted access to this industrial tech theme, where European engineering firms excel.

Source: Morningstar - 3 Highly Undervalued European Renewable Energy Stocks

How Big is the Value Gap?

The valuation disparity between U.S. and European markets has reached historic proportions. According to Rothschild & Co, at the end of 2024, U.S. equities traded at approximately 22 times earnings (near record highs) while European equities hovered around 13 times (in line with historical norms). This 40%+ valuation gap was the widest ever recorded (Rothschild & Co, 2025 Outlook).

Similarly, J.P. Morgan notes that European indices trade at just about 14 times forward earnings, compared to approximately 22 times for the S&P 500. Consensus expectations call for only about 8% earnings growth in Europe versus 14% in the U.S. – meaning Europe faces lower hurdles for positive surprises (J.P. Morgan Asset Management, 2025).

As Janus Henderson Investors puts it, Europe's "attractive valuations and under-owned status" act as a "safety net" for investors. They point out that global investors are underweight Europe, so any improvement could spark significant inflows (Janus Henderson, Jan 2025).

Source: Rothschild & Co - 2024 Review and 2025 Outlook: European actions

Practical Ways to Gain European Exposure

For American investors looking to diversify internationally, here are some U.S.-listed ETFs that provide targeted European sector exposure:

ICLN – iShares Global Clean Energy ETF: Offers exposure to renewable energy companies worldwide, with a significant portion in European clean-power leaders like wind turbine makers and utilities.
ROBO – ROBO Global Robotics & Automation ETF: Tracks a basket of robotics and industrial automation firms globally, including many innovative European manufacturers in Germany, Switzerland, and other countries.
LUXX – Roundhill S&P Global Luxury ETF: Focuses on the world's top luxury goods companies, heavily weighted toward European luxury icons like France's LVMH and Hermès.
IEUS – iShares MSCI Europe Small-Cap ETF: Targets smaller European companies across various sectors, providing diversified access to Europe's small-cap segment, which could offer superior growth potential as Europe's economy improves.

Each of these ETFs is readily available to U.S. investors, offering practical ways to gain exposure to promising European sectors while diversifying beyond domestic markets.

What Could Drive Further European Outperformance?

Several catalysts could potentially support continued European market strength:

Fiscal stimulus: Germany's massive investment plan (approximately €500 billion) could boost Europe's largest economy significantly (Janus Henderson, Jan 2025)
Policy tailwinds: EU-level efforts to cut red tape and mobilize high private savings into investments are underway (Janus Henderson, Jan 2025)
Sentiment shift: Global investors are underweight Europe, meaning any improvement could trigger substantial inflows (Janus Henderson, Jan 2025)
Valuation reversion: The extreme valuation gap between U.S. and European markets suggests potential for mean reversion (Goldman Sachs, Jan 2025)

According to Morningstar's Q2 2025 outlook, after a strong Q1 rally, European equities moved to within about 2% of their fair value estimates (up from a 5% discount in late 2024), closing much of the valuation gap with the U.S. However, many individual sectors and companies still offer compelling value.

Source: Morningstar - European Stock Market Outlook: Where We See Opportunities in Q2

Conclusion: Time to Look Beyond U.S. Borders?

While U.S. markets have dominated for years, the historic valuation gap between U.S. and European equities suggests this might be an opportune time for American investors to diversify internationally. With European stocks trading at significantly lower multiples, improving economic policies, and several promising sectors showing strength, Europe offers potentially attractive opportunities for those willing to look beyond domestic markets.

As Tancred Vierkant, European equity fund manager, noted about renewable energy stocks, "The market completely threw the baby out with the bathwater" (Morningstar, Apr 2025) – a sentiment that might apply to European equities more broadly. For careful investors, this could represent a chance to add quality European exposure while valuations remain compelling.

Consider consulting with your financial advisor about whether adding some European exposure through the ETFs mentioned above might be appropriate for your portfolio. The combination of attractive valuations, improving sentiment, and specific sector strengths makes Europe worth a fresh look in 2025.

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