Equity European equities: an underappreciated source of global investment opportunity

European equities are often viewed through a narrow macro lens, driven primarily by euro-area growth expectations. However, this perspective understates their true potential. Today’s European equity market represents a diversified, innovation-driven and globally connected opportunity set, offering investors access to high-quality companies with competitive advantages, attractive valuations and long-term structural growth drivers.

Europe: a global innovation hub

Contrary to common misconceptions, Europe is not an innovation laggard. It is home to a dense cluster of high-performing innovation economies. In the 2025 Global Innovation Index, 16 European countries ranked among the top 25 globally, underscoring strong research ecosystems, skilled talent pools and a track record of producing globally competitive businesses.

This innovation extends beyond early-stage disruptors into large, established companies across sectors such as healthcare, technology and industrials. Leading firms such as ASML and AstraZeneca demonstrate that investors can access world-class innovators in Europe.

Attractive valuations and diversification benefits

European equities offer a compelling combination of lower market concentration, more attractive valuations and broad sector exposure compared to US equities. The MSCI Europe Index is not dominated by a handful of mega-cap companies, providing investors with diversified sources of return potential. 

Valuations are also relatively appealing. Based on 12-month forward price-to-earnings multiples, European equities trade at a discount to their US counterparts across most sectors, creating potential for stronger long-term returns.

Added to this has been a shift in investor behaviour, with European equities outpacing US markets over 2025, as capital rotated away from richly valued US stocks.

Global revenue drivers

European listed companies are not solely dependent on domestic demand. Approximately 60% of revenues for companies in the MSCI Europe Index are generated outside Europe, providing exposure to global growth across the US, Asia-Pacific and emerging markets. This international footprint helps reduce reliance on any single economy and enhances portfolio diversification.

Structural growth opportunities

Alongside this, there are several long-term structural trends that should help underpin European equity markets over time:

• Reinvigorated industrial base: Increased defence spending, infrastructure investment and supply chain reconfiguration are driving growth across Europe’s industrial base. Defence budgets have risen significantly, with spending expected to exceed €380 billion by 2025. The scale and direction of this shift are supported across political parties and member states. The implications extend beyond defence alone, creating multi-year opportunities across manufacturing, energy systems and digital infrastructure.
• Healthcare innovation: Europe has a deep and diverse healthcare sector.  Advances in genomics, drug discovery and artificial intelligence are enhancing innovation pipelines and supporting sustainable long-term growth.
• Financial sector transformation: European banks have undergone substantial restructuring, including improved balance sheets, stronger governance and disciplined capital allocation. Rising interest rates have boosted profitability, while attractive valuations and increasing dividends offer compelling income potential.

Why European equities matter for portfolios

European equities can play a strategic role in global portfolios by providing:

• Diversification of growth potential
• Access to innovation-led companies
• Exposure to long-term structural tailwinds
• Improved fundamentals in key sectors

As global equity leadership looks to broadens beyond US mega-cap technology stocks, European equities are increasingly positioned as a valuable source of diversification and return potential.