European Stocks: A Rich, And Cheap, Opportunity

Forbes

18-05-2025

Europe by night.
Until recently, the Old World has been feeling its age, as European stocks largely lagged behind U.S. equities. Last year, the MSCI EAFE index, which covers developed countries excluding the U.S. and Canada, inched ahead just 4.3%, while the S&P 500 racked up a 25% gain. That situation reversed dramatically in 2025, as of Friday, with the MSCI index up 15.4% and the S&P 500 ahead just 1.3%.
There is a strong case to be made that developed-market international equities, meaning non-U.S. stocks and particularly European ones, could have a sold upward path ahead of them. So argues Elisa Mazen, head of global growth at ClearBridge Investments, which is a unit of Franklin Templeton, in an interview.
Rising U.S. tariffs and higher European fiscal stimulus stand to expand the Continent's earnings, she notes—and sweeter profits tend spark stock appreciation. Add in the potential for lower European regulatory burdens and the result, she says, would be to 'jumpstart earnings growth and equity valuations in the region.'
A ClearBridge research paper (Mazen co-wrote it, with colleagues Michael Testorf and Pawel Wroblewski) points out that 'Europe now offers a better setup for earnings growth from depressed levels and scope for multiple expansion as more investors recognize the region's potential.'
Mazen acknowledges that United States stocks boast bounteous strengths, such as tech leadership and deep wells of capital. Still, the U.S. has some drags such as trade imbalances and a spiraling federal budget. Donald Trump's tariffs likely will have a negative effect on inflows into U.S. equities. Meantime, no big fiscal stimuluses are envisioned by Washington nowadays.
One big advantage for the MSCI EAFE basket of foreign stocks, which along with Europe includes such big players as Japan and Australia: The exchange-traded fund that tracks them, iShares MSCI EAFE, has an expense ratio of just 16.9, versus the main ETF for the S&P 500, the SPDR S&P 500 ETF, at 25.6. In addition, individual European stocks are way cheap: shares in financials, consumer staples, consumer discretionary and health-care companies are trading at large discounts to American counterparts.
Then there's the added attraction of European fiscal stimulus. Consider Germany, the world's third largest economy, behind the U.S. and China. In March, Mazen notes, the German parliament approved an infrastructure fund of a half-trillion euros and eased a cap on defense outlays, plus it okayed more spending on energy transition and semiconductors.
Political developments are a big impetus for the changes. As the ClearBridge research paper notes, 'Combined with genuine fear of Russian aggression once again in Europe and the rise of the far-right party in the recent German elections, Germany instituted a meaningfully large defense and infrastructure package. More fiscal spending increases are expected in other markets, as well.'
At some point, the Ukraine conflict will be over, and the need for post-war reconstruction should provide additional impetus for economic development, Mazen contends. Heavy construction equipment, steel and cement will be in demand. The World Bank projects that the effort will cost $480 billion. Peace could also bring resumption of Russian natural gas shipments to Western Europe and Britain, thus lowering energy costs for businesses and consumers, an economic boon.
And that's not all. The ClearBridge paper finds that 'a lasting peace could spur renewed Western involvement in Russia.' Withdrawal of European investment has led to lost revenue of $60 billion, according to the paper, which added, 'Could those return? We believe it's a possibility that markets are not discounting.'
Overall, good old reversion to the mean likely is coming, Mazen states. Her firm's paper states: 'Developed market valuations have barely budged in the last 20 years (compared to a 40% rise in U.S. multiples). However, we believe this low starting point, taken together with broader policy catalysts in a rapidly evolving geopolitical landscape, most notably in Europe, provides scope for a reversion in global equity leadership.'