Europe's Resilience Re-Rate

A Different Kind of European Shock

As we touched on in our recent paper “European Exceptionalism on Sale”, Europe has spent much of the past decade being priced as something of a fragile region. The critique is familiar: low trend growth, an economy hostage to imported energy and little exposure to the technology themes that have driven global returns. Fragmented policymaking and heavier regulation complete the charge sheet. Much of it has been grounded in real experience, from the sovereign debt crisis to the inflation shock that followed Russia's invasion of Ukraine.

The latest shock has again tested Europe's energy sensitivity and geopolitical exposure, this time through the US-Iran war and renewed volatility in oil and gas markets. Yet eurozone equities have performed broadly in line with US and global markets year-to-date, with the region having recovered much of the relative ground lost in the immediate aftermath of the conflict. UK equities have also delivered strong gains and have marginally outpaced continental peers in local-currency terms—the FTSE All-Share Index is up 13.4% against 12.2% for the MSCI EMU Index year-to-date.¹

The market recovery partly reflects intermittent optimism about a negotiated settlement between the United States and Iran, although the conflict has proved more protracted than markets hoped in the early summer and energy prices remain above pre-conflict levels. Europe also appears better prepared to deal with the energy-related challenges than in previous shocks. It has already lived through one major energy crisis, and the behavioural response is visible in company meetings as much as in policy design. Russian pipeline gas supplied roughly 40% of European Union (EU) imports in 2021; it now supplies 6%, and storage entered the conflict at 63% of capacity against 30% at the same point in 2022.²

The European Central Bank's (ECB) September decision captured this balance. The Governing Council raised its three key rates by 25 basis points, taking the deposit rate to 2.50%, its second increase since the conflict began. It noted that the war continues to generate inflation pressures and that inflation is set to remain above target for an extended period, with staff projections now showing headline inflation averaging 3.0% in 2026 and 2.5% in 2027. The response was measured: a quarter-point move with no pre-commitment to a rate path.

Earnings Have Absorbed the Pressure

According to our numbers, FY 2026 earnings per share (EPS) expectations for the MSCI Europe Index have been upgraded by around 5% year-to-date, despite the disproportionate impact that the Iran war and energy costs might have been expected to have on the region.³ Those upgrades now imply expected growth of around 12.5% year on year versus 2025, with limited upgrade contribution from the second half so far.

If Europe were still behaving like the fragile earnings region of the old stereotype, a renewed energy shock would have translated quickly into downgrades. Instead, the earnings base has held. Energy, financials, and defence have led the upgrades, with consumer discretionary (specifically autos and luxury goods) the only major group to see estimates cut.

None of this makes Europe the highest-growth equity region in the world. Aggregate EPS growth still lags global markets, at 12.5% against 14.2% for MSCI ACWI, largely because Europe does not have the same concentration in artificial intelligence (AI) and mega-cap technology.

What the Discount Pays For

By our current measures, the MSCI Europe Index trades on 17.6x trailing earnings, compared with 22.3x for MSCI ACWI Index and 25.4x for the S&P 500.

Better performance from here requires only that European earnings prove more durable than investors assume, and that the discount be recognised as too wide relative to the region's improved resilience. US-style growth is not part of the requirement. In that context, the valuation gap is the compensation investors receive while waiting for a more durable earnings story to be recognised.

Listings First, Then Deals

The value in European stocks has been discussed for years, but the duration and depth of the discount now appear to be producing action. The first phase was listing arbitrage. CRH and Ferguson moved their primary listings to New York in search of deeper capital markets and broader investor pools, with CRH completing its transition in 2023; Linde consolidated on the NYSE by delisting from Frankfurt the same year.

The second phase is mergers and acquisitions (M&A). As Exhibit 2 shows, the value of announced M&A involving publicly listed European companies in 2026 had already surpassed every full-year total since 2007 by 30 October. Intesa Sanpaolo’s US$35.3 billion bid for Monte dei Paschi, the largest European deal since 2018, is one prominent example.⁴

The deal list is also broadening. Recent activity around easyJet, Rotork, JDE Peet's, InPost, Allfunds and AkzoNobel suggests that strategic and financial buyers are increasingly prepared to underwrite European assets before public markets fully re-rate them. The largest example is Prologis' agreed £14bn acquisition of SEGRO, which the SEGRO board recommended in August at a 39% premium to the undisturbed share price. It takes the United Kingdom's biggest real estate investment trust out of the London market, and Prologis intends to take a secondary London listing as part of the deal.

Fiscal Push, Monetary Drag

Policy change in Europe is usually slow and dispersed, but its direction is becoming more supportive. Defence and infrastructure spending are rising. At the EU level, the Savings and Investments Union is intended to channel more European savings into productive investment, and the simplification agenda targets a material reduction in administrative burdens. The Commission has framed the Savings and Investments Union around Europe's need to finance strategic investment, citing the 2024 Draghi Report's estimate that the region requires an additional €750bn to €800 billion of annual investment by 2030.⁵

The most immediate fiscal impulse is likely to come from Germany. The €500bn Special Fund for Infrastructure and Climate Neutrality is designed to fund additional investment over a 12-year period, from transport to hospitals to grid and climate-related infrastructure. Delivery has disappointed so far: €24bn had been committed by the end of 2025, against the roughly €40bn a year the fund's size implies.

The interest-rate backdrop has turned into a modest headwind. The Bank of England held the Bank Rate steady at 3.75% in September for the sixth consecutive meeting, although three of the nine Monetary Policy Committee members voted for an increase, UK inflation rose to 3.1% in August, and the Bank expects it to peak slightly above 4% in the first quarter of 2027. Alongside the ECB's two quarter-point increases, that is a tightening bias across the region.

For equities, the level of rates matters as well as their direction. Even after those hikes, the ECB's 2.50% deposit rate remains below the UK’s 3.75% and the US federal funds target range of 3.75% to 4.00%.⁶ It also remains below its 4.00% peak in 2023, while UK inflation is 3.1%, against 11.1% at its 2022 peak. Markets have priced in a quarter-point rise at the Bank of England’s 5 November meeting as more likely than not.

Investment Conclusion

Europe may still lack a single moment-in-time catalyst. The structural change taking place does not depend on one. Earnings expectations are improving through an external shock and a tightening cycle, valuations remain at a discount to global markets and announced deal value has risen. German fiscal money is starting to move, and EU-level reform is increasingly focused on competitiveness and scale.

Europe is proving more resilient than investors assume, while still being priced as though fragility is the default. That is the basis for a resilience re-rate—a gradual recognition that European earnings and corporate value are stronger than the old narrative allows.