Why Europe is a powerhouse of investment potential

Europe is in focus for investors. US political and policy uncertainty, especially over trade tariffs, and the broader move to deglobalisation, have driven investors in their droves towards the region.

Certainly, Europe’s recent market outperformance, versus the US, has starkly illustrated this.

But beyond US-driven geopolitical uncertainty, Europe boasts a wealth of investment potential – it’s a leader in sustainability; home to numerous leading international companies; and houses one of the world’s largest stock exchanges, Euronext, which has a market capitalisation of some $6trn.¹ Moreover, potential changes in global trade and security relationships provide Europe with an opportunity to generate an even stronger unified economy and financial market infrastructure.

Economic heavyweight

There is no doubt that Europe has suffered from sluggish growth. In the second quarter (Q2), Eurozone GDP grew by 0.1% compared to Q1’s 0.6%. But there is plenty of fuel in the tank to help boost future expansion.

In its latest World Economic Outlook, the International Monetary Fund forecasts 1% and 1.1% growth in 2025 and 2026 for the Eurozone, up from 2024’s 0.9% total.[i] Greater potential growth is baked into the region as the 27-state European Union (EU), home to 448 million plus consumers, is one of the world’s largest economies – and its biggest single market. The EU is the top trading partner for 80 countries, while the US is the top trading partner for just over 20 countries.², ³ And aside from Europe’s backdrop of lower interest rates, Germany’s easing of its debt rules, with some €1trn earmarked for defence and infrastructure spending, could prove to be highly significant for greater long-term growth across the bloc. Certainly, the scope exists for further economic and financial unification of the EU’s members as an antidote to any negative impact from the US-led trade war.

Deep investment potential

While the generative artificial intelligence revolution has helped steer US equity markets to a spate of fresh highs over recent years, sky-high valuations, alongside political uncertainty, have seen investors pivot towards new opportunities. Tellingly, year to date the Euro Stoxx 600 index is up 26%, while the US blue-chip S&P 500 has achieved 11%.⁴ Additionally, Europe’s selection of value stocks – compared to the US’s growth stock dominance - alongside higher dividend yields have provided additional incentives.

Encouragingly, equity analysts continue to expect earnings growth for the Euro Stoxx universe of companies to run at an annual rate of 7.6% with the 2026 earnings-per-share consensus estimate at €40.20 compared to €36.10 for this year. According to Bloomberg, European earnings growth is running at 15% for Q2 so far. The argument for European equities remains strong when US valuation measures are flashing “risk”.⁶ Historically, total returns from European equities have been more balanced, with dividend income providing as much to returns as pure price gains, in contrast to the US.

In the fixed income universe, European corporate bond markets continue to be supported by resilient fundamentals, attractive yields and strong inflows. Demand is likely to increase further as investors look to lock in attractive yields.

Notably, euro-denominated bond issuance by non-euro area corporations has soared in 2025, reaching nearly €100bn by around mid-June, compared to an average of €32bn over the same period in the past five years.⁷

Given concerns about policy in the US, there is scope for international investors to increase their allocation to bonds in Europe. Certainly, from the perspective of Asian investors, hedging foreign exchange risk is cheaper for a portfolio of European bonds than it is for those that are dollar denominated.

A global sustainable investment leader

Europe remains a driving force behind international climate initiatives – it is a well-established green innovation hub. It was in Europe, 10 years ago, where the Paris Agreement on climate change - to limit global warming to well below 2°C - was adopted.

Annually, clean energy investment needs to rise to $4trn – and Europe looks set to potentially benefit, creating new potential opportunities for investors.⁸ This pace of investment is supported by the significant foundations of the 2019 European Green Deal, which aims to make Europe the first climate-neutral continent by 2050. The initiative focuses on multiple areas, from boosting clean energy investment to climate technology innovation, to the oceans, agriculture, transport as well as finance and regional development through sustainable investments.

Challenges and potential ahead

Of course, Europe is not without its challenges – European profitability will undoubtedly endure the brunt of US trade tariffs, and then there is the prolonged war in Ukraine. But long term, it is likely to continue to offer investors an ever-expanding range of opportunities. A more cohesive and focussed approach by European leaders, further capital market and banking integration, and the benefits of the common funding of renewable energy and other infrastructure projects should provide strong long-term underpinnings for economic growth. Peace in Ukraine, a settled relationship with the US, and a commitment to innovation are additional elements of what could be a much brighter future for Europe.