European Equities

2025 was a groundbreaking year, as many international markets outperformed the S&P 500 in USD terms due to solid market performance and local currency gains.

In today’s edition, we explore some of the opportunities present in European markets and discuss whether now is a good time to take advantage of Europe’s discount to US equity markets.

Examining Opportunities in Europe

European equities had a very favorable performance in 2025 and are currently attractively positioned in terms of relative valuation. It may make sense for some people in the market to consider diversifying their portfolio by considering international markets like Europe.

Europe’s economic outlook is a mixed bag, and some key markets like Germany may deliver some improvements in 2026. There are also interesting pockets of value in other European emerging markets.

Macro Outlook in 2026 and Beyond 

For several decades, the EU has lagged behind the United States in terms of its growth and labor productivity. Moreover, while 28 of the top 100 companies were European ten years ago, only 18 of them are now.

This change has been reflected in many indices, including the MSCI World Index, which is heavily dominated by the United States.

US tech companies have dominated the landscape in recent years. However, there are still plenty of pockets of value in various European markets.

2026 may be a better time to consider the market, as it has a solid benchmark of performance in 2025 and has improved several indicators, such as inflation. Inflation is poised to potentially drop below 2%, which could help support rate cuts in 2026 or later, providing a needed spark for economic growth.

Europe’s growth outlook is still hazy, as improvements in key countries like Germany may help drive a recovery in the region. Goldman Sachs projects that growth in the region will rebound to 1.3% in 2026, driven by improvements in notable markets like Germany.

Valuation Appeal of EU Equities

Value investing is often about looking in relatively unloved or overlooked places. The preference for EU equities came into play in 2025, when the European market outperformed the S&P 500.

Is Europe poised to have the same outcome in 2026?

One of the main appeals of investing in Europe, apart from global diversification, is the cheaper valuation of the market. European equities trade at a substantial discount to global equities, and most importantly, at a massive discount to the S&P 500. As of the end of January, the market traded at 15.36x forward earnings and offered a circa 3% dividend yield.

This puts European equities at a massive discount to US-dominated indices, and makes it worthwhile to check out some of the value in the market. However, equities are not that cheap on a relative basis, as Goldman Sachs recently noted they are in the 71st percentile in terms of their historical valuation over the past 25 years.

For those concerned about the tech-dominated rally of the S&P 500, which has led to record high valuations, European equities can still be an alternative to examine. There are also many higher yielding EU focused investment products to check out.

European ETFs

One of the simplest options to gain exposure to the market is to invest in European ETFs, including regional ETFs and single-country ETFs. There are many European ETFs to consider with reasonably high dividend yields.

The WisdomTree Europe SmallCap Dividend Fund invests in European small-cap stocks with a market cap of $10 billion or smaller. This ETF currently trades at around 13x earnings and has a 4.5% dividend yield.

If you want to target larger companies in Europe, the iShares MSCI Europe ETF is another investment product to consider. This ETF invests in leading blue-chip companies in Europe, including Roche Holding, Novartis, Astrazeneca and Nestle.

Most major European markets have single-country ETFs for investors who want to make bets on specific markets. Spain and Finland are two larger developed markets with reasonable dividend yields, while Poland is also another solid emerging market play that currently yields over 4%.

There are several ETFs for these countries, including the iShares MSCI Poland ETF, the iShares MSCI Spain ETF, and the iShares MSCI Finland ETF.

The Eurozone still has substantial economic risks, and equities in this region could still mean revert in 2026 if economic or geopolitical risks heat up. However, the relative value in these markets currently looks appealing, and Europe could be a good market to focus on if you want to diversify away from the higher valued US markets and find deeper value in Europe.