The macroeconomic backdrop in Europe continues to improve, and valuations have rebounded strongly with European equities now trading at just a 1% discount to Morningstar’s fair value estimate.
This is great news for those already invested, but a tougher environment for investors seeking fresh value opportunities.
“Despite the overall rally, valuations vary widely across the region,” said Michael Field, chief equity strategist at Morningstar. “Spain and Italy stand out as the most expensive markets, trading materially above fair value and outperforming economically.”
“In contrast, the Netherlands and Denmark remain the cheapest large markets, largely due to heavy exposure to underperforming giants ASML and Novo Nordisk,” Field added.
Asked in a fairly valued market, where do investors find opportunity? Field was unequivocal.
“Small-cap and value stocks,” he said. “The valuation gap between large caps and small caps is even more pronounced in Europe than in the US. Value stocks trade at a reasonable 5% discount, while small caps offer a much steeper discount, which makes an attractive proposition compared to historical norms.”
Sector dispersion also creates openings.
“Of the nine sectors we cover, more than half still offer upside potential,” added Field. “Communications have shifted from one of the most expensive to the cheapest sector in Europe. Meanwhile, financial services, following a stellar 2025, is now the most expensive, followed by utilities.”
Almost 40% of stocks under Morningstar coverage are rated 4 or 5 stars, with only around 20% in overvalued territory.
Four-star stocks appear in nearly every sector, underscoring the breadth of opportunities for investors.
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