A new era? From US exceptionalism to exceptional European value opportunities

Rediscovering Europe

One of the risks of a trend with powerful momentum such as the long-run rally in US equities is that it can induce FOMO (fear of missing out). As investors join the party to participate in the potential gains, they can in fact be ignoring the promising opportunities that lie elsewhere. 

The European stock market has certainly been overlooked by investors in recent years. In contrast to the idea of US exceptionalism, there has been considerable pessimism about Europe’s prospects lately – the ongoing Ukraine war, higher energy prices, government fiscal constraints and the economic slowdown in China have all contributed to a tougher backdrop. 

Economic growth in the eurozone has also been relatively lacklustre post-covid – in the fourth quarter of 2024, the euro area grew 0.9% year-on-year, compared to the US which expanded 2.5% in the same period². 

With few globally-leading tech companies, Europe’s markets have not participated in the AI-driven excitement since ChatGPT launched in 2022.

Despite not having many big AI-related companies, Europe has no shortage of well-run and strongly moated companies, from global champions to dominant niche players and local structural growers, observes John William Olsen, manager of the M&G European Sustain Paris Aligned strategy.

“There is unique luxury brand heritage to be found in Europe, but also big global food brands, regionally defined spirits brands and world-leading industrial brands, a great design tradition in Northern Europe, as well as successful innovation hubs such as Oxford University and the ecosystem around Novo Nordisk in Denmark,” he explains. 

“Most of the European winners are truly global and will benefit from economic growth outside of their own country or region”.

There are notable differences between Europe’s leading companies and their counterparts in the US. Europe’s biggest companies are much more diverse than the tech-focused Mag 7, encompassing luxury goods, pharmaceuticals and consumer staples. 

While the US is an incredibly vast and deep market, investors tend to focus on the Mag 7, which are all linked to a similar new economy theme. They have also become a large and dominant part of the S&P 500. At the start of 2025, the Mag 7 represented about 33% of the index and their performance can influence the overall returns of the market³.

For investors concerned about the concentration risk in the US market, Europe, could be seen as offering a broad range of potential opportunities, across diverse sectors and markets. 
 

Europe’s valuation discount

However, the main distinction between US and European markets currently, and the one that has arguably encouraged investors to shift their focus to Europe, is valuations.

European stocks currently trade at a significant discount to their US counterparts. While the valuations of US equities have risen significantly in the past couple of years, Europe’s market has barely moved and looks attractively valued relative to its history. 

Investors have historically paid higher valuations for US stocks than their European counterparts for some of the reasons discussed above, higher profitability and a supportive economic backdrop. However, this discount has been widening recently and perhaps investors are asking whether it has become too stretched. 

The fact that European stocks trade at a discount to their US peers in every sector is an encouraging backdrop for investors, according to Richard Halle, manager of the M&G European Strategic Value strategy.

“Although the US is home to high-flying technology firms that are driving the AI revolution and companies also benefit from lower energy costs than their European counterparts, it is questionable whether the environment is that much better than in Europe,” says Halle. The outlook for Europe is not as bad as feared and, in Halle’s view, the discount is not warranted.

The diverging fortunes of US and European equities this year suggests that investors might be starting to agree with Halle. Europe’s renaissance is still nascent and it remains to be seen whether the trend gains momentum. However, there are arguably some significant political and macroeconomic developments taking place that could support a more optimistic long-term investment outlook for the continent.
 

Trump forces Europe to act

A notable, and rather unexpected, catalyst behind the revival of Europe this year is US President Donald Trump. Since returning to the White House, Trump has disrupted the economic landscape with a series of proposed tariffs on imports. He has also upended the geopolitical landscape by indicating that the US might reduce its commitment to European defence. 

In response to Trump’s ‘America First’ agenda and Europe’s apparent need to stand on its own two feet, European policymakers have announced policies that could not only deliver security but also provide a long-term economic boost to the region. 

Most significantly, Germany’s chancellor-in-waiting⁴, Friedrich Merz, announced a huge investment in infrastructure and defence, saying that Germany would do whatever it takes to secure freedom and peace. The decision to reform the so-called “debt brake”, which has limited the country’s budget deficit to 0.35% of GDP, to enable greater spending is arguably evidence of the seismic shift under way. 

Combined with the European Union’s plan to increase defence spending by €800 billion over the next four years, Germany’s fiscal largesse could significantly invigorate economic activity in Europe. 

From an investment perspective, defence companies clearly stand to benefit significantly from Europe’s military build-up and their share prices have been among the best performers this year. 

But the spending could permeate down to all parts of the European industrial complex. Companies in the steel and cement industries, which have struggled from subdued demand in recent years, could benefit from the effective reindustrialisation in Europe. If economic growth picks up as a result of this investment, interest rates may have to stay higher for longer, which could be helpful for Europe’s banks. A more buoyant economic environment could also feed through to consumer spending.
 

A favourable environment for value

While Europe’s economy could be vulnerable to a protracted trade war with the US, as well as any wider slowdown in the global economy, the proposed stimulus measures potentially provide a very positive backdrop for investment in the region. 

Halle is optimistic about the outlook for European equities currently, and especially for cheap, unloved value stocks. “There is a perception that value investing is old news, but in Europe the value style has been thriving,” he points out. 

Having been out of favour for so long, it’s taking time for investors to recognise that value investing works but he believes the case for European value is compelling right now. Halle highlights the wide spread in valuations between the cheapest and the most expensive stocks as creating a favourable environment for value investors. 

With value opportunities on offer right across the market rather than being confined to a few sectors or regions, Halle says European value investors can construct diverse portfolios of attractively valued, well-managed, decent companies. Importantly, there is no need currently to invest in distressed or restructuring companies. “Value investors today can find attractive opportunities without sacrificing very much quality or growth. It is a very exciting time,” says Halle.