Written by Suryaveer Singh | 3 Minute Read
Few markets are as underestimated as Europe. The reflexive view is that the region offers little growth, weak returns, and chronic underperformance, now compounded by cheap Chinese competition. Yet the data increasingly challenge that narrative. European equities have been among this year’s better performers, outpacing the S&P 500 since the start of 2025 despite a tariff shock and energy crisis. We believe Europe warrants a meaningful strategic allocation, and many of the reasons investors dismiss it are a decade out of date.
First, growth and profitability are improving. First-half EPS growth is tracking around 14% year-over-year, the strongest pace in three years, while 2026 earnings forecasts have been raised to 15%. ROE has also improved as margins, buybacks, and bank profitability recover from the era of zero rates.
Second, the China threat is narrower than headlines suggest. The pressure on German autos and chemicals is real, but the broader European market is less exposed than commonly assumed. Financials, pharma, energy, utilities, telecoms, and aerospace make up a large share of the index and are largely insulated from low-cost Chinese competition. Autos now represent just 1% of European market capitalization despite accounting for roughly a tenth of sales.
Third, flows, valuations, and currency provide additional support. Europe is seeing its strongest equity inflows in a decade, aside from 2021, as investors diversify away from a highly concentrated US market. European equities also trade at a substantial discount to US stocks even after accounting for differences in growth and sector composition. A stretched dollar provides another potential tailwind, as a weaker dollar would boost the value of euro-denominated exposure for US investors.
The case is not without caveats. Europe lacks the high-growth companies that dominate US markets, domestic savings remain underinvested in equities, and the 2027 election calendar introduces political and fiscal uncertainty. Europe also lags the US in AI, although that may prove less of a disadvantage than it appears. As hyperscaler capex is increasingly funded through debt and equity issuance amid questions about its returns, Europe’s position as a market that generates cash rather than consumes it, with a free-cash-flow yield well above the US, looks more like a hedge than a handicap. During the DeepSeek selloff, European equities rose even as US tech fell sharply.
The case for Europe is not a bet against the US, whose growth engine and technological leadership remain unmatched. Rather, European equities combine resilient earnings, improving returns, strong cash generation, and a substantial valuation discount, offering a counterweight to the concentration now characterizing many portfolios. Against a backdrop of concentrated US and dollar exposure, a strategic allocation to Europe remains a valuable source of diversification and resilience.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or
reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Tax services provided are separate from the Securities or Advisory services offered through Leo Wealth Americas. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.
Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance.
