Why Europe? The case for European equities in 2025 and beyond

The old narrative is hard to shake

One of the key narratives of recent economic history has been the precipitous decline of Europe’s role in the global economy. A range of factors, from a lack of investment and technological shortcomings to policy and demographic challenges, have converged such that lacklustre growth had come to be considered the norm in Europe. This is borne out by a range of statistics, not least Europe’s relative share of world gross domestic product (GDP). In 1980, Europe (including the United Kingdom) represented around 35% of global GDP, while the  United States represented 25%. Today, the US’ share has remained constant but Europe’s has slumped to 15%--a startling decline.

This has given rise to a sense that European markets are defined more by a history of missed opportunities than momentum. Until very recently, this underperformance has weighed down investor sentiment. In  the post-global financial crisis (GFC) period, the region lurched from crisis to crisis, which certainly didn’t help, including  a sovereign debt crisis, Brexit, sluggish reform, and an energy shock following Russia’s invasion of Ukraine. It wasn’t until 2020 that many European indexes finally cleared their pre-2008 peaks.

This backdrop has created a kind of institutional muscle memory—one that views Europe as being chronically behind the curve, structurally uninvestable, or at best, a tactical allocation. But this framing is increasingly out of step with the facts on the ground.

Here, we make the case that investors would do well to revisit the narrative. The old story of a stagnant, crisis-prone continent no longer holds and, in our view, is giving way to a new phase, built on renewed resilience, capital investment, and sectoral leadership. And for once, it’s not being written in crisis but in quiet, structural change.

Institutional push for growth in Europe

A  sense of adversity has catalyzed many of the continent’s greatest developments, a clear pattern in recent European history. The eurozone itself, the banking union, and pandemic-era fiscal coordination all emerged under pressure. Now, with the United States’ arguable retreat from its traditional global leadership role, Europe once again faces a moment that demands a coordinated, proactive response. And this time, the early signs suggest it is rising to the occasion.

German stimulus measures, headlined by a €500 billion infrastructure package, represent a decisive break from Berlin’s cautious fiscal orthodoxy. This “fiscal bazooka” is meaningful enough to impact GDP growth across Europe. Similarly, the EU’s commitment of €1 trillion to defense over the next decade is another historic shift that rivals the scale of the bloc’s sovereign bailouts during the debt crisis in the early 2010s. Commitments from those members within NATO to increase a broader definition of defense spending toward 5% of GDP are also likely to drive investment into infrastructure and technology.

Former Italian Premier Mario Draghi’s recent report on the future of European competitiveness highlights—with some urgency—the need for Europe to take a more structured and coordinated approach in addressing its productivity stagnation and strategic vulnerabilities. Draghi recommends up to €800 billion in annual investment across energy, innovation, and infrastructure. The review’s emphasis on regulatory simplification, capital market integration, and industrial policy coordination signals a shift toward a more proactive economic model which could significantly boost long-term GDP growth by enhancing resilience and competitiveness across the bloc.

The Draghi report was officially published by the European Commission on September 9, 2024, with Draghi himself presenting the report to the European Parliament later that month. In the year since, it is possible to identify some clear shifts in European governance that represent an early implementation of a Draghi-type approach.

A clear example of this is the streamlining of corporate sustainability reporting. The European Commission has begun reshaping sustainability regulations through its 2025 Omnibus Package, responding directly to concerns raised in Draghi’s competitiveness report. Key changes include delaying CSRD and CSDDD deadlines, raising thresholds to reduce the number of affected companies, and simplifying disclosure requirements. These reforms aim to cut over €6 billion in compliance costs, underlining a shift from regulatory ambition to economic pragmatism in a way which balances sustainability imperatives with industrial competitiveness.

Elsewhere, moves toward greater defense integration demonstrate the resolve of Europe’s political class to press ahead with meaningful reform. The recently published Defence White Paper which establishes a framework for the ReArm Europe initiative marks a clear pivot toward more coordinated defense capabilities, an area Draghi stressed as being vital for Europe's geopolitical resilience. With the €800 billion earmarked for joint investment and a new SAFE loan scheme to support defense spending in fiscally constrained member states, the EU is taking steps toward strategic autonomy. Simplified procurement and certification processes are also being introduced to reduce fragmentation.

Draghi’s report may well serve as a roadmap for a new approach by the European Commission and lead to radical changes of EU economic policy. Early signs are that policymakers are adjusting their approach and are becoming more pragmatic. As deployment of existing fiscal plans show signs of genuine GDP stimulation, we believe a sustained recovery in investment flows and equity performance in Europe should follow.

Already in 2025, forecasted EU GDP growth is rising with upward revision taking estimates toward the high end of its 10-year average. Following more than a decade of underperformance, Europe is starting to converge with the United States, even amid tariff uncertainty and political fragmentation. The next 5-10 years of European growth looks appreciably better in our view than the previous 5-10 years.

Ongoing valuation gap

Notwithstanding a rally in early 2025, investors haven’t meaningfully re-engaged with European equities. Until recently, the MSCI Europe Index had outperformed the MSCI USA Index year-to-date (in US dollar terms), but once accounting for the currency effect, the index returns in euros have been modest. More tellingly, the top 10 European companies by market capitalization at the start of the year have declined by an average of 1%.¹ These names represent more than 20% of the region’s market cap.² If there’s a great European rotation underway, it isn’t yet showing up in the numbers.

Valuations reinforce this disconnect. European equities continue to trade at deep discounts to US peers, often well below their own 10-year averages, despite an improving fundamental backdrop. It is striking is how little optimism is priced into European equities as domestic and international champions—whether in luxury, healthcare, or industrials—continue to trade at large discounts to intrinsic worth. We believe this presents opportunity, particularly for selective investors.

This valuation gap becomes more relevant when considering market composition. The US market now accounts for 65% of global equity market cap.³ Even a modest reallocation from passive flows or asset allocators could have a significant impact on European markets, especially if growth dynamics continue to close the transatlantic gap.

We believe the European market currently presents investors with an opportunity to find better quality for the same price—or the same quality for a lower price—across multiple sectors. The valuation gap has narrowed in 2025, but it has not yet fully played out. European stocks remain cheap even as the market environment turns a corner, offering a compelling entry point for those willing to look beyond headline flows.

Market breadth and opportunity set

Beyond the tactical case relating to market and valuation dynamics in 2025, Europe has the advantage of offering a broad and diversified opportunity set that stands in contrast to the increasingly concentrated US market. In the United States, just four companies—NVIDIA, Microsoft, Apple and Amazon—account for roughly a quarter of total market capitalization. In the MSCI Europe Index, it takes 16 companies to reach the same level of concentration, and only one, holds a weight above 2.5%.

The European market spans a wide range of sectors and includes global leaders in areas such as semiconductor capital equipment, pharmaceuticals, luxury goods and electrification technologies.

Closer to home, Europe’s renewed focus on strategic resilience, as demonstrated in its proposed investment across energy, defense and infrastructure, is reinforcing its domestic industrial strengths. These policy shifts are unlocking capital expenditure and supporting long-term themes like decarbonization and supply-chain reconfiguration.

For investors looking beyond index-level flows, we believe Europe presents a deep and diverse equity universe where fundamentals matter and where active decisions can add value.

Europe’s resilience and the path forward

Europe has a history of responding to crises with renewed cohesion and strategic investment. The current environment, characterized by geopolitical uncertainty, shifting alliances and economic headwinds, appears to be catalyzing another such moment. Germany’s proposed overhaul of its debt brake and its €500 billion multi-year investment package signal a meaningful shift in fiscal policy. These funds are earmarked not just for defense and climate initiatives, but also for infrastructure, education, and digitalization—areas with strong economic multipliers and long-term growth potential.

At the EU level, coordinated efforts are underway to unlock hundreds of billions in defense and clean energy funding. This scale of investment, if executed effectively, could provide a powerful tailwind for European growth and equity markets.

Europe has often emerged from prior crises more unified. The current geopolitical landscape has brought France and Germany into closer alignment, while non-EU countries such as the United Kingdom and Norway are cooperating more closely in response to shared risks. This convergence could accelerate decision-making and regulatory simplification—two long-standing impediments to competitiveness.