03 Apr 2026
European equities are trading at a historically wide discount to US equities across almost all valuation metrics and sectors. While part of this gap reflects weaker growth, lower returns on equity, and Europe’s sector mix, the scale of the discount is increasingly difficult to justify on fundamentals alone. With pessimism deeply embedded in prices and expectations low, our investment team highlight why the selective upside is now increasingly compelling.
On a forward price-to-earnings basis, Europe trades at roughly a 30–35% discount to the US - far wider than its long-term average. Historically, European equities traded only modestly cheaper than US equities. Since 2015, however, this relationship has broken down, driven primarily by sustained US multiple expansion rather than a material drop in European profitability.
The divergence is even more pronounced on price-to-sales and price-to-book metrics. While structurally lower margins and returns on equity account for part of the gap, European margins have not deteriorated over time and, in some cases, have improved. This suggests valuation compression has outpaced changes in fundamentals.
US re-rating partly explained by stronger sales
Stronger US growth has been a key justification for higher valuations. Since 2015, US sales per share have grown at approximately 5% per annum, compared with roughly 0.5% in Europe. This is a meaningful difference, but two important caveats apply. First, the growth gap is partly cyclical, reflecting Europe’s greater exposure to repeated macroeconomic shocks. Second, valuation differentials have widened by significantly more than growth differentials.
In a global context, the US increasingly appears to be the valuation outlier, while Europe trades closer to Japan and emerging markets. This comparison reinforces the view that the US premium reflects elevated optimism as much as superior fundamentals.
The US appears to be the valuation anomaly
Source: Fidelity International, LSEG DataStream, MSCI indices, January 2026.
Europe’s heavier exposure to banks, energy, and industrials helps explain lower headline multiples, but it does not explain why European equities trade at a discount across every sector. Relative to history, European valuations are depressed across the sector spectrum, indicating a broad-based risk premium rather than sector-specific weakness.
Financials: European banks are better capitalised, less complex, and more profitable than at any point since the Global Financial Crisis. Once returns are considered, price-to-tangible-book multiples are broadly comparable with US peers, yet lingering investor scepticism continues to weigh on valuations.
Energy and utilities: European energy companies trade at around a 30% discount to US peers despite broadly similar earnings and return profiles. Utilities display a similar pattern, with 20–25% valuation discounts for largely comparable regulated businesses.
Healthcare: Historically trading at parity, European healthcare now trades at roughly a 15% discount despite similar post-pandemic earnings growth - an unusual gap that appears largely sentiment-driven.
Industrials: US industrials generally enjoy higher margins and capital efficiency than in Europe, but comparable headline valuations mask selective opportunities among European industrial champions, which offer strong incumbency advantages and durable market positions.
Europe’s valuation appears low in absolute terms, but even more so when set against a US market that has benefited from a decade of multiple expansion, earnings concentration in mega-cap technology, and supportive policy tailwinds. From a global perspective, the risk of mean reversion arguably sits more with US valuations than with Europe’s.
No sector better illustrates the gap between perception and reality in Europe than financials. For more than a decade following the Global Financial Crisis, European banks were structurally weak: over-levered balance sheets, poor asset quality, repeated regulatory interventions, dividend restrictions, and chronically low returns on equity. For many investors, this experience continues to define the sector.
Yet the fundamentals have changed materially. Capital ratios are now roughly double pre-GFC levels, balance sheets have been de-risked, loan-to-deposit ratios have normalised, and cost structures have been rationalised through branch reductions and digitalisation. Crucially, profitability is no longer driven primarily by leverage or one-off trading gains, but by structurally higher net interest income and improved operating efficiency.
Returns on tangible equity for large European banks are now broadly in line with the wider European market and, in several cases, comparable with US peers. This has enabled the resumption of meaningful capital returns, with many banks offering double-digit cash yields through dividends and buybacks while retaining excess capital buffers.
Despite this progress, European banks continue to trade at discounts to both the broader equity market and their own long-term average valuation multiples. This suggests investors remain anchored to historical experience rather than current fundamentals. While structural challenges persist - slower GDP growth, regulatory complexity, and political fragmentation - the sector today is more resilient, better capitalised, and more disciplined than at any point in the past fifteen years.
For client portfolios, the implication is not that European banks are risk-free, but that markets continue to price them as if previous problems are permanent. As confidence in the sustainability of returns builds, financials represent one of the clearest areas where Europe’s valuation discount could narrow without requiring heroic macroeconomic assumptions.
Europe deserves to trade at a discount given slower growth and structural challenges. However, current valuations imply structural decline rather than structural slowdown. Balance sheets are stronger, expectations are subdued, and investors are increasingly paid to wait. Europe may not be the fastest-growing equity market, but it is one where disciplined, selective stock-picking can exploit valuation gaps shaped more by memory than by reality.
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As an investment Director, Natalie is responsible for product development and product integrity to ensure that the firm’s services meet the needs of clients and prospects. Natalie has 22 years of industry experience. She began her career in asset management in 1999 as an Equity Analyst at Henderson Global Investors and went on to work as an Equity Analyst at Brewin Dolphin from 2005-2009. After a career break, she joined Fidelity as a Senior RFP Specialist in 2014. She moved on to an Investment Director role in 2016 supporting the Equity Income, Emerging Markets and Global equity franchises before moving to the European team in 2018. Natalie has a BA (Hons) in Economics from Durham University and is an Associate of the Society of Investment Professionals.
Adnan joined the Editorial team in 2016 and subsequently moved into the Equity Investment Directing team in 2020. He was previously a financial writer at the Financial Times Group and a credit analyst at BNP Paribas and Morgan Stanley. He holds a Masters in Finance from London Business School and is a CFA charterholder.