We remain optimistic about the prospects of finding attractive value opportunities across Europe, despite the recent political uncertainties in France and the United Kingdom. Germany is spending more on infrastructure and defense, which can bolster European economic activity; interest-rate cuts have improved financial conditions; the labor markets are strengthening; and reform efforts can enhance regional competitiveness. All these factors can be catalysts, in our view, for boosting stock valuations.
Muddled politics won’t derail a rebounding economy
The new budget season has brought politics back to the fore. France’s prime minister resigned after losing a no confidence vote, the UK government continues to struggle to get policies enacted, and Germany still must pass its 2025 budget before turning to 2026. Uncertainties have pushed up bond yields in France and the United Kingdom. French 10-year yields now sit near their Spanish and Italian counterparts—both of which have better controlled their fiscal deficits of late. (See Exhibit 1).
The challenges in France look pressing, given a ballooning deficit. Former Prime Minister Francois Bayrou struggled to win support for his proposal to tame a deficit that reached 5.8% of gross domestic product (GDP) last year. The socialists proposed more modest cuts and tax increases. The new prime minister, Sébastian Lecornu, now must find a compromise. If no budget is passed, the 2025 budget would continue, making the fiscal situation less dire, in our view.
In the United Kingdom, the deficit is not nearly as bad, but past political missteps from both the current and former governments have made markets wary. And Labour has struggled with its reform agenda despite its large parliamentary majorities. Nonetheless, we’ve seen the adoption of new housing policies and greater infrastructure spending, which should boost economic activity.
Germany spends, Europe benefits
While some countries work through their politics, Germany has loosened its fiscal constraints after years of careful spending. The new government plans to spend over €1 trillion on both defense and infrastructure over the next 12 years. While a 2025 budget still needs to be finalized, Germany will be spending much more over the coming years.
As Europe’s largest economy, greater spending can spill over into broader economic activity, with the European Central Bank (ECB) forecasting the current program can add 0.25 percentage points to eurozone GDP growth during just the period from 2025 to 2027.1 (See Exhibit 2).
Additionally, we expect the benefits of the European Central Bank’s (ECB’s) recent string of interest-rate cuts to continue to flow through to the economy over the near term as financial conditions ease. The European labor market is in better shape and could support more domestic spending and economic activity2 but an aging population could be a longer-term constraint.
The European Union also continues to tackle reforms, albeit slowly, that can boost competitiveness and growth. We believe the job creation and industrial production that may start to follow could boost economic activity, while laying the groundwork for stronger investor returns.
Risks still exist. Inflation continues to stir, energy markets remain vulnerable to supply disruptions, and US tariffs could dampen the economic outlook. Meanwhile, a recent rise in the euro relative to the US dollar underscores the desire for investors to diversify away from the greenback and may be a sign of increased interest in the region’s assets as the fundamentals outweigh the risks.
Catalysts can spark a rerating
Underscoring this appeal, improving economic activity due to greater capital spending and reform efforts can serve as catalysts to boost cheap European stock market valuations, in our view. The region trades at a wide discount to its US counterpart, with European value stocks remaining particularly appealing. (See Exhibit 3).
Stocks in some industries already have garnered much more investor interest in the past year, with European banks, for instance, outperforming US mega-cap technology stocks. (See Exhibit 4).
Those industries that may benefit from less regulation, like banks, and those areas that may see greater consolidation, like telecoms, may be attractive value investment candidates, in our view. Banks, for instance, are improving their returns on equity amid a lower regulatory burden.
Cyclicals also look attractive to us. Valuations have come down for a range of companies even as their growth rates have stayed relatively steady. Should economic activity pick up, we could see both earnings and multiple expansion over time.
Furthermore, European companies are placing more emphasis on improving shareholder returns through ongoing dividends and increasing share buybacks. Stock buybacks, which have been strong in the United States, are now a greater part of how European companies return cash to shareholders, on top of already robust dividend payouts.
Despite the current political uncertainties, as the benefits of increased German spending and recent interest rate cuts come through, we believe the longer-term outlook for value investing in Europe remains attractive. European equities continue to beckon.
EndNotes
1. Source: “Eurosystem staff macroeconomic projections for the euro area.” European Central Bank. June 2025.
2. Source: Lagarde, Christine. “Beyond hysteresis: resilience in Europe’s labor market.” European Central Bank. August 23, 2025.
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