European Stocks: Reasons to Reconsider

European equities may offer an increasingly attractive complement to U.S. stocks as growth, fiscal policy, earnings, valuations, and diversification conditions improve.

• Europe has a strong cyclical bias, with Financials, Industrials, Consumer Discretionary, Energy, and Materials representing about 62% of the MSCI Europe Index as of August 31, 2026; the global composite PMI reached 53.5 in August, its highest level since May 2023.
• Germany could introduce an approximately €1 trillion multi-year infrastructure and defense package, while European banks are healthier and Financials account for 26% of MSCI Europe versus 12.2% of MSCI USA.
• STOXX Europe 600 earnings growth accelerated from 11.8% in the first quarter of 2026 to 23.9% in the second, while the consensus 2026 EPS growth estimate rose from 9.4% at the start of the year to 16.2% by August 25.
• Europe trades at 14.7 times next-12-month earnings with a 5.5% free-cash-flow yield, compared with 19.6 times and 2.9% respectively for the United States; its total-yield advantage has widened as U.S. AI capital spending absorbs cash flow.
• The 10 largest stocks represent 21% of MSCI Europe versus nearly 40% of the S&P 500, and Europe’s correlation with the S&P 500 is currently close to 0.60, below its historical average.

Takeaway: Investors should maintain a globally diversified equity portfolio with a deliberate allocation to Europe rather than abandon U.S. equities, while recognizing risks from weaker global growth, tighter liquidity, a stronger dollar, geopolitical tensions, energy shocks, and eurozone structural problems.