Six reasons European equities deserve a place in your portfolio

By James Yardley on 10 August 2026 in Europe

When it comes to European equities, it always seems the cons outweigh the pros. Attractive valuations, a well-capitalised banking sector and improved fiscal spending all give renewed optimism to the region in 2026. However, fears around slower growth, the perception it has less innovation than the US and, more recently, higher energy prices mean any sort of optimism often peters out.

Last year, European equities produced the strongest returns of any major economy (26.4%)*. The first quarter of 2026 saw similar optimism due to stronger earnings and improved sentiment. However, this changed in March with the onset of conflict in the Middle East – optimism has since given way to volatility and dispersion in returns with inflation and rising interest rates back on the radar.

For the past 15 years or so, Europe has largely been viewed as a diversification play from the tech heavy US giants dominating the market. But the case for European equities is much wider today and offers some peace of mind for risk-averse investors – with this in mind, we thought we’d run through six reasons why European equities are attractive to investors in this climate.

Policy support

There are plenty of areas of the European market which are now being offered policy support. The drive to strengthen energy security has accelerated investment in renewables following successive energy shocks, while governments are also backing industries such as manufacturing, industrial materials and defence to improve the region’s long-term competitiveness and resilience.

Financials have also received greater attention since the publication of the Draghi report in late 2024, which prompted initiatives aimed at strengthening European capital markets. Although progress has been slower than initially hoped, the banking sector remains well capitalised and is operating in a supportive interest-rate environment.

This is one reason Fidelity European Trust manager Marcel Stötzel continues to favour the sector. Financials account for almost 30% of his portfolio**, with higher interest rates supporting bank profitability while valuations remain relatively undemanding. He has recently added positions in BNP Paribas and Deutsche Börse, where higher market volatility has also supported trading activity.

Rising innovation (including AI)

Europe may not lead the race to develop the largest AI models or build the biggest data centres, but it plays an important role in enabling the technology. Rather than competing directly with US software giants, many European companies sit further along the AI value chain, supplying the industrial automation, engineering, electrical equipment and infrastructure needed to support its rollout.

This extends beyond technology companies. Utilities, for example, is a good example according to a recent update from Invesco:

Janus Henderson European Focus fund manager Robert Schramm-Fuch says the idea that ‘Europe lacks innovation’ is an oversimplification in general. He says: “The opportunity is increasingly found in pockets of global leadership; businesses enabling the technologies that power modern economies. This includes advanced computing, industrial automation, electrification, and the infrastructure required to move power and data efficiently.”

Fiscal bazooka

We’ve talked about policy support but the change in policy is also important. Europe’s expanding fiscal stimulus — often described as a “fiscal bazooka”— is expected to accelerate investment in infrastructure, defence, energy transition, and industrial competitiveness. Increased public spending can support stronger economic growth, improve corporate earnings, and create attractive long-term opportunities across sectors benefiting from government investment.

Germany alone has approved a €500 billion infrastructure and climate investment fund over 12 years – equivalent to around 11.6% of German GDP – to modernise transport, energy, digital infrastructure and housing. In parallel, the European Union has launched plans to mobilise up to €800 billion in additional defence investment, including €150 billion of EU-backed loans, while relaxing fiscal rules to encourage higher national spending***.

Valuations

In the US the 10 largest names now account for roughly 35% of the S&P 500; the equivalent figure for the STOXX 600 is about 15%. Not only is the US market concentrated in terms of size of companies and market cap, but it’s also concentrated in terms of returns****.

European equities currently trade on around 16.1x forward earnings – this compares to 20.1x for the US. The discount is currently in the 25% range^.

Investors may want to consider a valuation driven fund like WS Lightman European in this space. The 40-50 stock portfolio is all about being contrarian and going against the herd. It relies on a process built around the years of academic research which show that value has historically outperformed in the long run.

Income opportunities

Europe has historically been one of the strongest regions for equity income investing, offering higher dividend yields than the US alongside a broad range of companies with established dividend-paying cultures. This is due to several reasons, such as the makeup of the European market, with sectors like financials, insurance, energy and utilities being prominent and known for paying dividends.

The US cannot match these dividend levels – especially when some of the large US tech companies are pulling back on buybacks so they can fund growing CapEx spending.

BlackRock Continental European Income targets undervalued stocks that offer sustainable dividends, potential dividend growth and inflation protection. Co-manager Stuart Brown joined us recently to discuss improving earnings and dividend growth, the funds positioning and improving business fundamentals across the region.

Diversification

While the US is heavily driven by tech, Europe is more of a bet on industrial production, global trade, lower energy costs, consumer spending and financials. This offers the ingredients of a broader-based recovery, particularly if a solution to the US-Iran stand-off (resulting in lower oil/energy prices) is found. When compared with the US, Europe has more exposure to the likes of luxury goods, industrial automation, pharmaceuticals, consumer goods and global banks and insurers.

A well-diversified portfolio worth considering is JPMorgan European Growth and Income. The managers of this trust aim to build a portfolio of around 90 stocks by targeting attractively-valued, high-quality businesses with positive momentum. The trust also targets a 4% annual dividend which is paid on a quarterly basis. This is an all-weather portfolio which is reasonably risk-averse and has several active stock, sector and regional constraints built into the process.

*Source: FE Analytics, total returns in pounds sterling, 1 January 2025 to 31 December 2025

**Source: fund factsheet, 30 June 2026

***Source: Natixis

****Source: Goldman Sachs, 5 June 2026

^Source: JPMorgan, Guide to Markets Q3 2026, data at 3 August 2026