The elevator pitch for European equities

The recovery in European equities has been driven to a large extent by higher valuation multiples, but earnings growth has also contributed. Excluding energy, MSCI Europe earnings per share are expected to grow by some 15% in 2026, while the market trades at around 14.2 times forward earnings. With interest rates normalising, this does not look particularly expensive to us.
Europe also offers a rather different sector exposure from the US. Less technology, more financials, which should benefit from a higher interest rate environment. With the US market increasingly concentrated around a handful of companies benefiting from the AI theme, European equities offer some welcome diversification.
As the chart shows, Europe's valuation discount to the US has started to narrow, potentially breaking a trend that has lasted almost ten years. We do not believe that this gap will disappear entirely, given the differences in sector composition, profitability, political and structural issues burdening the Old Continent. But there is equally no reason why it should remain as wide as it has been.
For us, the case for European equities remains intact. Earnings are growing, valuations are still reasonable and there are plenty of companies that have been largely ignored by investors. As always, what matters is what we pay for the businesses we buy, not where they are listed