The table below presents the current and historical price-to-earnings (P/E) ratios of the European stock market. These ratios are calculated using the STOXX Europe 600 index, which includes large, mid, and small-cap companies from 17 European countries, including the United Kingdom. As of January 1st, 2025, the trailing P/E ratio of the European equity market stands at 17.44, and the forward P/E ratio is 13.84. The CAPE ratio is 19.99.
European companies saw robust earnings growth in 2022, driven by a post-pandemic recovery. This momentum began to slow in 2023 as inflationary pressures and rising interest rates started to weigh on corporate profits. By 2024, earnings faced further challenges as sluggish economic growth and geopolitical tensions created a more difficult environment for European companies. Looking ahead, analyst expectations for 2025 remain cautious, with forecasts reflecting very modest earnings growth.
European equities are significantly cheaper compared to U.S. equities when assessed across various valuation metrics. However, it’s important to note that the market structure between the two continents differs considerably, particularly in the Technology and Communications sectors. Therefore, direct comparisons of overall market valuations between Europe and the U.S. should be made with caution.
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| Date | Price (STOXX Europe 600) | P/E (TTM) Ratio | EPS (TTM)* | Forward P/E Ratio | CAPE Ratio |
|---|---|---|---|---|---|
| 12/31/2024 | 507.62 | 17.44 | 119.11 | 14.03 | 19.99 |
| 6/30/2024 | 511.42 | 17.12 | 122.26 | 13.77 | 20.37 |
| 12/31/2023 | 479.02 | 15.00 | 130.65 | 12.81 | 19.69 |
| 6/30/2023 | 461.93 | 15.48 | 122.09 | 12.80 | 19.37 |
| 12/31/2022 | 424.90 | 13.05 | 133.22 | 12.10 | 18.53 |
| 6/30/2022 | 407.20 | 13.04 | 127.78 | 12.17 | 19.02 |
| 12/31/2021 | 487.80 | 19.96 | 100.00 | 17.46 | 24.78 |
* The EPS (earnings per share) in the table above has been indexed to a base value of 100 as of January 1, 2022.
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Historical Valuations and Outlook for European Equity Market
Historically, European stock valuations have varied, with periods of both overvaluation and undervaluation relative to global markets. Over the past decades, European equities have most of the time traded at lower valuations compared to U.S. equities. This disparity has been attributed to factors such as differing economic growth rates, sector compositions, and investor sentiment. Notably, European equities have historically offered higher dividend yields, which can influence their overall valuation metrics.
The current undervaluation of European stocks, combined with improving economic conditions, suggests a more constructive outlook for the region’s equity market. Analysts recommend reassessing underweight positions in European equities within global portfolios, considering the potential for value appreciation. European equities can provide a good alternative if you are worried about the future performance of the U.S. Magnificent 7 companies.