Why European equities deserve a fresh look
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Key takeaways
- European equities are back in vogue, supported by strong inflows and resilient market performance.1
- A more favourable macroeconomic outlook, easing inflation, and the prospect of further ECB rate cuts provide support for further upside potential.
- Financials—particularly Economic and Monetary Union (EMU) banks—stand out due to attractive valuations, stable earnings, and strong shareholder returns.1 Additionally, the Aerospace and Defence sector is benefitting from increased spending across Europe.
European equities are back in favour and, in our view, present compelling opportunities despite ongoing economic and geopolitical uncertainties. A strong start to the year,1 attractive valuations, and a more favourable macroeconomic backdrop — marked by easing inflation, a dovish European Central Bank (ECB), and the prospect of further rate cuts—have boosted investor confidence and driven demand for European equity UCITS ETFs.
Among key sectors, Financials stand out, benefiting from improving margins, stable earnings, and shareholder-friendly policies. Aerospace and defence also present opportunities, underpinned by structurally higher spending.
Source: Amundi, Bloomberg. Data as at 19/02/2025.
Past performance is not a reliable indicator of future performance.
Why we see upside potential in European equities
Falling inflation and lower rates to boost demand
Global economic growth is expected to remain modest over the next couple of years, with European growth likely to lag. However, the ECB is increasingly confident of reaching its 2% inflation target this year, allowing for further rate cuts—potentially bringing rates down to 1.75% by year-end.
Lower interest rates and subsiding inflation should translate into higher real incomes, improved credit conditions, and stronger consumer demand, all of which could further support equities in the region.
Tariff risks: A manageable challenge
Uncertainty around the imposition of tariffs and their effects on European companies remains a concern. For instance, European stocks fell from record highs in late February 2025 following President Donald Trump’s threat of a 25% tariff on European Union imports, specifically targeting the automotive sector.
That said, the EU is actively working to mitigate these risks by expanding its network of bilateral and regional trade agreements to reduce reliance on the US. Importantly, from an equity perspective, we estimate that only about 6% of European corporate sales2 are at risk from tariffs, meaning that the overall market should remain resilient.
Additionally, regulatory easing could further support corporate margins, helping European companies navigate these external pressures and maintain profitability.
Attractive valuations provide room for growth
Current valuations in European equities remain attractive, reflecting a highly cautious economic outlook. However, as economic sentiment stabilises, there is significant potential for valuation multiples to expand.
Higher dividend yields: A potential source of income
One of the key advantages of European equities is their generally higher dividend payout ratios compared to US stocks3. For instance, as shown below, the Stoxx Europe 600 offers an estimated dividend yield of 3.1%, significantly higher than the 1.3% yield of the S&P 5004. This makes European stocks particularly appealing for income-seeking investors.
Source: Amundi, Bloomberg as at 28/02/2025
Financials: A sector poised for further gains
Among the sectors driving European equity performance, Financials—particularly EMU banks—stand out as a key source of strength.
Several structural factors continue to support the banking sector:
- Reasonable valuations: Despite strong performance, European bank stocks remain fairly valued, with price-to-book ratios only slightly above historical levels.1
- Strong lending margins: Robust net interest margins, driven by higher rate levels, have supported stable earnings.
- Increased M&A activity: Banks have benefited from sector consolidation, which has improved cost efficiency, capital strength, and liquidity.
- Shareholder-friendly policies: EMU banks lead the market in shareholder returns, accounting for nearly 20% of total share buybacks in the Stoxx Europe 600 in 2024.5
These factors contributed to EMU banks delivering nearly a third of total European equity market gains last year, making them a top-performing sector again in 2025.1
The role of M&A and shareholder value creation
The European banking sector has seen increased cross-border mergers and strategic partnerships, strengthening competitiveness and enhancing profitability. Additionally, banks have effectively deployed capital through share buybacks, boosting earnings per share (EPS) and increasing investor returns.
With stable net interest margins, strategic M&A activity, and a strong focus on capital return, EMU banks remain a key sector to watch in the current market environment.
Structurally higher spending to support Aerospace and Defence
Beyond financials, another sector presenting significant opportunities is Aerospace and Defence. Defence budgets across Europe have been structurally increasing, driven by heightened geopolitical tensions and commitments to NATO spending targets. In February 2025, European Commission President Ursula von der Leyen stated that EU member states’ collective defence spending should increase “from just below 2% [of EU GDP] to above 3%,” highlighting the growing focus on security and military capabilities.
Conclusion: A market segment with strong potential
European equities have started the year on a strong footing,1 attracting renewed investor inflows and benefiting from a more favourable macroeconomic environment. While risks remain — ranging from geopolitical tensions to economic uncertainty — low valuations, falling inflation, and a supportive ECB policy stance provide a favourable setup for further upside.
The Financials sector, particularly EMU banks, remains a key driver of this momentum, benefiting from attractive valuations, strong earnings, and a shareholder-friendly approach1. Meanwhile, Aerospace and Defence stand out as a structural growth opportunity, supported by rising defence spending across Europe. This creates a compelling investment case for long-term growth.
For investors seeking diversification6, income, and long-term growth potential, European equities deserve renewed attention in today’s market environment.
Access the opportunity
1. Past performance is not a reliable indicator of future performance
2. Source: Amundi Institute - February 2025
3. Past market behaviors are not a reliable indicator of their future behaviors.
4. Source: Amundi, Bloomberg as at 28/02/2025
5. Source: Amundi ETF / Bloomberg - March 2025
6. Diversification does not guarantee a profit or protect against a loss.
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