Market Matters

Equity Investing in Europe’s Elusive Growth Story

15 April 2025

8 Minute Read

Thorsten Winkelmann Chief Investment Officer—European and Global Growth

Marcus Morris-Eyton Portfolio Manager—European and Global Growth

Europe is often seen as an inferior source of growth to the US for equity investors. But high-quality companies with exciting growth stories that support long-term return potential are scattered across the region—for investors who know how to find them.

Why Allocate to European Equities?

European markets were off to a strong start in early 2025, yet still face plenty of hurdles. The regional economy is sluggish. Equity markets in Europe have a relatively heavy contingent of cyclically sensitive stocks and have delivered weaker long-term performance than US peers. And like companies around the world, European businesses are facing big challenges from the escalating trade war. Many investors think Europe just isn’t the right place to find good growth stocks.

Think again. Here are three good reasons why:

For some industries, the economy doesn’t matter much: several European industries enjoy structural growth drivers that aren’t tied to macroeconomic growth such as technological trends, healthcare innovation, industrial automation and the energy transition.

Many European companies generate significant revenues from other regions: for European firms with a global client base, regional economic challenges have little to do with business results. Select companies should be capable of withstanding tariff pressures.

Quality businesses make the difference: competitive advantages, management skill and capital discipline can help sustain consistent earnings growth over time. Companies like these, with strong fundamental metrics, might be harder to find in in Europe. But with a well-defined investing process, investors can discover companies with compelling business advantages across the continent.

Pockets of Growth in a Lackluster Economy

If you’re an equity investor, fixating on Europe’s economy misses the point. Even as we begin to incorporate the impact of tariffs on the economy, we think companies within several European industries should be relatively resilient. Examples include industrials, semiconductors and electrical equipment, which have the potential to deliver robust earnings growth in the coming years, well above the region’s meager GDP growth forecasts.

But identifying appealing industries isn’t enough. We believe investors must look within structurally growing industries for high-quality businesses that can sustain consistent earnings growth over time—even amid new risks. Select companies with the right attributes often offer investors higher and more sustainable long- term growth rates than their industry groups. That augments the compounding power of holding these businesses for at least five years.

Clear competitive advantages in industries with high barriers to entry enable companies to thrive through good and bad times. Management skill and capital discipline help support growth through changing conditions. Strong fundamental metrics—such as return on equity and return on invested capital—point to business models with staying power. These characteristics help bolster high cash flows that can fuel strong earnings growth over time.

Some European Industries are Poised for Rapid Growth

MSCI Europe Industry Groups Consensus
Earnings-per-Share Growth Estimates
CAGR 2024-2027 (Percent)

Current forecasts do not guarantee future results.

GDP estimates based on aggregate Bloomberg GDP forecasts.
CAGR: Compound annual growth rate.
As of December 31, 2024
Source: Bloomberg, MSCI, Thomson Reuters I/B/E/S and AllianceBernstein (AB)

Remember What Really Drives Long-Term Returns

It’s a really simple principle that’s often forgotten in volatile markets: Earnings and cash-flow growth are the basic sources of long-term equity investment returns.

Over time, the performance of the MSCI Europe Index has closely tracked the earnings growth of its constituent companies. And the MSCI Europe Growth Index, whose members have higher growth than the broad market, has delivered even better returns. This suggests that investors who identify companies with stronger earnings growth than the market should be rewarded with outperformance.

To do this, we think cash flows should be prioritized in fundamental analysis. That’s because cash flows are the lifeblood of a healthy business and underpin a company’s ability to sustain earnings growth. Although macroeconomic challenges and geopolitical hazards may set back markets from time to time, long-term equity returns are ultimately driven by a company’s underlying earnings trajectory.

Historical analysis and current forecasts do not guarantee future results.

Equity Market Returns Tend to Track Long-Term Earnings Growth

European Earnings Growth vs. Equity Returns 2005-2024 (In Euros, Annualized, Percent)

Past performance and current analysis do not guarantee future results.

EPS is earnings per share. Predicted long-term EPS Growth is based on analyst estimates for the long-term earnings growth rate. Realized earnings growth is the growth rate of EPS before extraordinary items for the last five years.
As of December 31, 2024
Source: MSCI and AB

Are European Stocks in Trump Trouble?

President Trump has launched a wave of policies that promote American manufacturing in ways that raise hurdles for non-US rivals.

Where does that leave European companies? It depends. As we see it, European companies that have already optimized their supply chains in response to the shocks experienced during the COVID-19 pandemic will be better placed to continue delivering efficiencies and earnings growth. In some cases, companies with high-quality businesses that are strong players in their industries will find it easier to optimize their supply chains to cope with the cost burdens of potential US tariffs.

Tariffs Don’t Instantly Destroy Demand
Yes, tariffs have increased the risks for many European businesses. However, some European companies operate in the US and may even benefit from US tariffs, particularly in the industrials sector.

While tariffs can dramatically raise costs, which are often passed on to customers, not every European company will instantly suffer a loss of demand. The effects will depend on many factors, including a company’s competitive positioning and pricing power. Companies that enjoy dominant positions in niche markets might be able to withstand a degree of tariffs.

Coping With Macro Headwinds
Of course, the European economy may face headwinds from new US policies, which seeks to promote US growth. Yet for some firms, a European domicile doesn’t necessarily mean higher exposure to regional risks. And investors should remember that tapping into sources of earnings growth that aren’t tied to macro trends can provide a cushion against macro-driven volatility.

Europe is facing big challenges during this period of political change from abroad—alongside political instability from within. Companies are facing new risks to business models and earnings.

Yet, for investors in European equities, the playbook for finding resilient companies shouldn’t change, even as the market, macro and policy variables are shaken up. Stay disciplined in the search for companies with durable business models while staying tuned to the ripple effects of policy changes. European companies that rise above the policy tremors ahead could offer underappreciated return potential in what is sure to be a volatile period.

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The playbook for finding resilient companies shouldn’t change… Stay disciplined in the search for companies with durable business models while staying tuned to the ripple effects of policy changes.

Look Far into the Future

Fast-moving news can rattle equity markets and make it hard for investors to think about the long-term outlook for a company. Yet today more than ever, in our view, it’s vital to maintain a long-term focus. As active equity investors, we think a minimum five-to-10-year time horizon is optimal.

That may sound like an especially long time to project an investment’s future. However, we think this approach creates an investing edge. It places business dynamics at the heart of the research process, enabling investors to gain greater visibility of a firm’s earnings trajectory, no matter how volatile the surrounding environment may be.

In a world of ever shorter attention spans, taking a very long view provides an advantage that we call time arbitrage. That means when a company’s shares are unfairly punished because of short-term uncertainty, we can strengthen positions and adjust holdings owing to our conviction in the long-term earnings outlook.

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In a world of ever-shorter attention spans, taking a very long view provides an advantage.

Think Like a Business Owner

Equity investors often buy a stock with a future sell date in mind. Business owners don’t do that.

Owners purchase a business to develop it, without a specified end date for engagement. With a business-owner mindset, investors will focus on operational attributes, such as the competitive moat around a company’s products and services or the corporate culture, and how they help support the sustainability of earnings.

This provides a very different perspective in which the fundamental business health is the highest priority. It can help investors filter out market noise that may distract investors from the essence of earnings success. And it can lead investors to companies in sectors and industries that aren’t always associated with growth potential, such as European industrials.

A business-owner approach can lead to even longer holding periods than our typical five to 10 years. In fact, select successful businesses may even deserve to be held in an equity portfolio for 15 or 20 years, which provides an added potential bonus of the compounding effect on returns.

Industrial Revolution? Europe’s Secret Source of Consistent Earnings

You aren’t going to find technology titans in Europe like those that dominate US growth stocks. But Europe’s industrial companies offer a different type of growth.

Industrials comprise 25% of the MSCI Europe Growth Index, nearly six times the weight of the sector in the US’s Russell 1000 Growth Index*. And European industrials are expected to see earnings growth increase from 12.9% in 2025 to 15.3% in 2026, comparable to US technology firms^†. Industrial companies with leading positions in niche markets often enjoy consistent growth due to strong market shares and competitive advantages. We see three promising business models in the sector.

Services and Spare Parts Providers

Companies that sell industrial tools or machines often generate long-term revenue from spare parts and services. These recurring purchases are less sensitive to economic cycles and command high margins.

Serial Acquirers and Consolidators

Some companies grow by acquiring smaller competitors, enhancing their market positions and achieving better pricing from suppliers. This strategy can drive additional growth alongside organic business development.

Digital Transformers

The line between technology and industrials is blurring. Many industrial products now include digital features like connectivity devices and data-capture sensors. These companies benefit from broader tech trends without relying on specific technology leaders.

*Source: FTSE Russell and MSCI ^†Based on consensus earnings forecasts, aggregated by Bloomberg. As of January 31, 2025.

European Equity Markets: A Compelling Discount

Even with a selective approach to European stocks, we understand that the broader regional macro and market environment can be a deterrent for investing in the region.

Valuations reflect that sentiment. The MSCI Europe Index traded at a price/earnings ratio of 14.6x at the end of February 2025, versus the S&P 500's 22.3x. While European stocks have consistently traded a discount to US peers over the past decade, these days, that gap has widened to a deeper-than-usual 35% discount to US stocks.

What would it take for that gap to start closing?

Valuation Discount vs US is Extreme

Price-to-Earnings Ratio (Next 12 months)

Past performance and current analysis do not guarantee future results.

As of February 28, 2025. Source; MSCI, S&P and AB.

Potential Catalysts for a European Recovery

Despite the risks, we see several potential catalysts that could reenergize Europe’s equity markets in the near term.

Macroeconomic growth in Europe could recover from a cyclical low. Tariff pressures could prompt the European Central Bank to cut interest rates further, which would also likely support GDP growth.

Before tariffs were announced, corporate earnings had held up relatively well, with European companies beating consensus expectations by 3% in the fourth quarter of 2024. European earnings have typically outpaced the economy by a wide margin (Display).

Fund flows could turn around. Since Russia invaded Ukraine, investors have pulled $150 billion from European equity funds, versus $1 trillion of inflows to US equity funds, according to Citigroup. As a result, global funds allocate only 5% to Europe, well below its weight of 13% in the MSCI ACWI Index, according to EPFR. So even a small shift in flows toward Europe could boost the market.

Company Earnings Growth Has Outpaced GDP

Five-Year Growth (Percent)

Past performance and current analysis do not guarantee future results.

*Real GDP growth is for the five-year period ending December 31, 2023 (latest available full-year data). Earnings-per-share (EPS) growth is for the five-year period ending December 31, 2024.
As of December 31, 2024.
Source: Bloomberg, FactSet, Thomson Reuters I/B/E/S and AB.

In Summary…

European companies with competitive advantages and quality businesses can shine regardless of the regional economic backdrop. Finding them requires a disciplined research approach that looks to the distant future to identify businesses benefiting from structural growth drivers that can thrive through episodes of market turbulence. We believe a portfolio that targets consistent drivers of earnings growth can provide equity investors with access to an unappreciated source of surprising long-term return potential that can withstand the tests of these volatile times.

Thorsten Winkelmann Chief Investment Officer—European and Global Growth

Marcus Morris-Eyton Portfolio Manager—European and Global Growth

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