LVMH and 11 More Stocks to Ride Europe’s Revival, From Our International Roundtable Pros
Stepped-up spending, higher interest rates, and fresh innovation are putting the continent back on investors’ maps.
Non-U.S. stocks are enjoying the strongest rally in 30 years, attracting even those U.S. investors who usually have little interest in overseas markets. The good news: It isn’t too late to get on board, especially in Europe, where stocks are responding to slow but meaningful policy shifts that should boost corporate earnings next year.
The MSCI Europe index is up 27% year to date in U.S. dollar terms, beating a 12% gain in the S&P 500 and ending a long period of underperformance. European stocks averaged a total annual return of 6.8% in the past 15 years, less than half the return of the S&P 500.
Barron’s recently convened a group of Europe-focused investment experts to size up the outlook for European markets after this year’s historic run. These pros see more gains in 2026, fueled by the normalization of interest rates, which will help financials; increased spending, especially on defense; and homegrown artificial-intelligence innovation, which is spurring demand for semiconductors and electricity to power the Continent’s data centers. What’s more, they highlight 12 stocks that stand to benefit from these trends.
Our panel, which met at Barron’s offices in New York, includes Matt Burdett, director of equities at Thornburg Investment Management and manager of the Thornburg International Equity and Thornburg Investment Income Builder funds; Osman Ali, manager of the Goldman Sachs International Equity Insights fund and global co-head of quantitative investment strategies for Goldman Sachs Asset Management; Julian McManus, who manages the Janus Henderson Global Select and Janus Henderson Overseas funds; and Davide Oneglia, senior economist at GlobalData TS Lombard.
Barron’s: European stocks are having a good year. What is driving the rally, and what accounts for the change in investors’ attitude?
Davide Oneglia: For a long time, Europe has been stuck in a lull. The economy had a shallow recovery from the double-dip recession of 2008- 09, followed by the European debt crisis. Monetary policy was very loose and couldn’t revive the economy—and fiscal policy was stuck in austerity [mode].
Now, we are emerging into a different environment: The monetary and fiscal policy mix is much more normal. Germany is pledging to spend seriously, providing a tailwind for investment. There is also a recovery in consumption because wage growth is much higher than prepandemic levels and labor markets are tighter. Finally, we have emerged from a period of extremely low interest rates, letting investors get decent returns. Equity valuations haven’t adjusted to this shift yet.
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Osman Ali: The European market hasn’t performed as well as the U.S. market [in the past decade] in part because of portfolio construction: The European market is 25% financials. Sixty percent is some combination of financials, healthcare, and industrials. About 35% of the U.S market is tech, compared with 8% of the European market.
With the tech renaissance in the past 10 years, it has been easy to look at the U.S. market and say it is a great place to invest. But if you take the Magnificent Seven stocks [Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla] out of the S&P 500, the S&P has gained less than Europe over the past five years. There have always been ways to make money in Europe, and that is particularly true now as the sectors that make up the majority of the European market are well positioned.
Why are they well positioned for gains?
Matt Burdett: Europe had negative interest rates after the financial crisis, which crushed earnings for financials, the largest sector in the index. Now, the rate environment is much more normal, as discussed.
European banks are seeing some of the best earnings revisions. People forgot that when you have normal policy rates, you can make money on deposits and in lending. There is a valuation argument [for the market], but also an earnings argument.
Julian McManus: If Europe is to grow and be self-sufficient, the banking system must be part of the solution to accommodate the changes needed in Germany—and across Europe.
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Capital has been built up as a result of overregulation. After the financial crisis, the European Central Bank not only stipulated higher capital requirements for banks but also required them to pay 10% of their earnings every year into a rainy-day fund. Tier 1 capital ratios now are sitting around 15%, higher than they need to be.
It is estimated that for every 1% cut to capital requirements, there could be 100 billion euros [$116 billion] of credit growth in Europe. This is going to be powerful for the broader economy, but also for European banks. There is still a lot of earnings acceleration ahead. It has been only partly reflected in bank shares.
What is driving Europe’s push toward greater self-reliance?
Oneglia: A more adversarial U.S. administration has left European policymakers with a sense that they are alone to fend for themselves. Also, China is rising as a major industrial rival to the core of [Europe’s] manufacturing sector, where Germany dominated and is now trying to play catch-up. Add the overlay of the Russian invasion of Ukraine, which is wreaking havoc with the European energy-supply balance, and there has been a realization that Europe is punching below its weight.
The European economy is big, but it needs to be integrated further to leverage its size. For example, there is a lot of research and development in Europe, and smart entrepreneurs. But to get the funding and scale to prove a concept, they need to come to the U.S., which is a single market, instead of 20 different governmental authorities. [European] politicians are addressing these issues, including finding a simplified way for companies to incorporate. There is a bigger push toward integrated capital markets.
Which banks could benefit from these shifts?
McManus: Banco Bilbao Vizcaya Argentaria, or BBVA, in Spain and Austria-based Erste Group Bank, which is exposed to Central and Eastern Europe, are both seeing robust loan growth. If their capital requirements are reduced, loan growth can accelerate further.
These banks are trading at single-digit price-to-earnings multiples and just above book value. That’s higher than not so long ago. But pre-financial crisis, they were generating a 15% to 20% return on equity and trading at two times book. With earnings acceleration, more capital generation, and still-depressed valuations, there is a long way to go.
Burdett: BNP Paribas is more of a value play. There has been some news around litigation risks in the U.S. [related to services the bank provided in Sudan through its Swiss subsidiary. The Swiss government has said the claims have no legal basis.] That forced a recent selloff in the stock.
But BNP is a big, incumbent European bank with operations across Europe. If you think about Europe’s push for self-reliance in the coming years, deeper capital markets are going to be a part of that. BNP should be able to take advantage of that, and it isn’t reflected in earnings [estimates].
How far along is the push to lower banks’ capital requirements?
McManus: It is being discussed at policymaking levels right now. But it isn’t just capital requirements that could be relaxed. Merger and acquisition activity is on the rise across European banks and banking unions, and regulation could be eased on several fronts to spur growth.
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Oneglia: Having deeper capital markets with a more developed pension sector can help finance some of Europe’s policy priorities, such as infrastructure, without impairing national budgets. The problem: Europe is slow. Until you see it happening materially, it is hard for the market to price it. But my conviction is high because there is no alternative, including politically.
Defense companies have done well amid this self-reliance push. Is there more upside in European defense stocks?
McManus: We are still constructive on BAE Systems, formerly British Aerospace. The platforms they are on and the programs they are involved in aren’t just short term, or related to helping Ukraine. These are programs that will be growing for 20 to 25 years. Historically, investors viewed BAE as a 2% grower. Now it is growing by more like high single digits, with improving margins, and the stock still doesn’t fully reflect that.
Ali: We have been overweight aerospace and defense for three-plus years, leading up to the Russian invasion of Ukraine. We were at a conviction level of three or four out of 10, playing that through Kongsberg Gruppen in Norway, Thales in France, and Rheinmetall in Germany. That is one of the things about Europe: Each country has its own play on a theme, providing a diversified set of stocks so you don’t have to bet on just one or two.
Our conviction level rose to a six or seven last year because of chatter [signals] in our quantitative investment models, and data from supply chains that indicated more demand for defense products from the U.S., even before Europe’s stepped-up armament plans. We bought shares of Safran, the French aerospace and defense company, Leonardo in Italy, and picks-and-shovels companies that supply the industry.
Our conviction has since come down to a five, given valuations and how much the stocks ran up, but we don’t see this theme as something to step back from.
What do valuations look like in the aerospace and defense sector?
Burdett: We are sellers rather than buyers at this point. We have owned Rheinmetall but reduced that stake over time. A lot of the [increased spending by Germany] has been reflected in the valuation.
Ali: The entire sector is trading at a premium to its own history, and the stocks are up 40% to 50% this year. But in Europe, we put a 20% weight on relative valuation and a 60% weight on whether a stock is exposed to some underlying theme.
The tendency for valuations to pull you back in Europe [via a selloff in the shares] is far less than in Japan, where you have to be a lot more careful about valuations. The culture is different, with more of a collective mind-set in Japan, and things there tend to revert to the mean. In the U.S., it’s the opposite: No one seems to care about valuations. Europe is somewhere in the middle. Themes are more important in Europe.
How significant is Europe’s planned shift in spending?
Oneglia: Just the physical and green infrastructure planned by the German government is a bit more than 1% of gross domestic product over the next 12 years. The Marshall Plan, by comparison, was 1% of gross domestic product a year. And this doesn’t include the money that could go toward defense, theoretically about 3% of GDP a year. It’s a lot of money.
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The real question for markets is the timing of this stimulus. Everyone has bought into the idea that this is going to happen. [German Chancellor] Friedrich Merz’s career essentially depends on this plan. Germany has changed the rules for its own fiscal debt brake, a big step.
Would I have hoped to see faster improvements? Yes, but we are still in the phase of a reasonable delay. Our expectation is to see more movement in the first quarter of 2026. The German government just approved a list of measures to cut red tape that should hasten deployment.
While Germany may be spending more, Chinese consumers are spending less as their economy struggles and China’s property downturn lingers. What does that mean for the European luxury companies that cater to Chinese shoppers?
Ali: There is a time to be overweight and a time to be underweight luxury companies such as LVMH Moët Hennessy Louis Vuitton and Richemont, usually with a six- to nine-month cadence. We time our positions in and out based on data beyond the themes or sentiment we pick up from our quant models. Right now, some of our signals indicate that sentiment improved since June but remains at a level lower than what we have seen as necessary for financial results to follow.
There are news reports that LVMH and Richemont are noticing increased demand but we aren’t seeing it yet, so we aren’t leaning into it too heavily. Rather, we are opting to reduce risk to these types of companies.
McManus: While Chinese luxury sales are still slightly down for the year, they are down much less than the declines seen earlier in the year. That improvement is being reflected in stocks such as LVMH, which we own. You also have to keep an eye on the property market, which is a big store of wealth. While prices are still declining, they are declining less than before.
Burdett: During the Covid-19 pandemic, China went through lockdowns on a scale that most people here wouldn’t comprehend. Also, the trade war has been ramping up. The Chinese Communist Party has tried to boost consumption to a larger share of the economy, but animal spirits are in a box. There are signs things are becoming incrementally less bad. There is a lot of pent-up demand among Chinese consumers, and European luxury brands are still sought after.
Chinese companies are increasingly going global. What does that mean for European multinationals?
McManus: There are going to be Chinese champions you want to own or keep an eye on—like CATL [Contemporary Amperex Technology] and BYD. German auto makers have a problem on their hands from Chinese competition.
Burdett: The Chinese innovation engine has been dramatic in a historical sense. In autos and electric vehicles they are a leader, even though we can’t buy Chinese cars here. That is a problem for the established auto makers [in Europe].
But think about biotechs. I used to be a chemist, and half the people in my lab 20 years ago were from China. There is a lot of innovation coming out of China. The drug industry has done a better job of embracing and integrating the Chinese research-and-development engine with collaborations. There aren’t only victims of Chinese innovation—there are also beneficiaries. Developing new drugs is hard; you need lots of shots on goal.
Do any European pharma companies benefit specifically from collaborations with Chinese companies?
Burdett: Not specifically, but I like Roche Holding. There was some excitement about the stock when the company bought some diabetes and obesity assets. It has since burned out. Now Roche is trading for less than 13 times next year’s forward earnings.
Roche is unique among pharma companies in that it has a diagnostics business, which can inform the drug side of its business. It recently came out with a blood test for Alzheimer’s and has an Alzheimer’s drug, trontinemab, in Phase III trials, with data expected in 2028. Alzheimer’s used to be the gold mine of the drug industry before obesity treatments. You aren’t paying for the Alzheimer’s opportunity in the stock at this kind of valuation.
McManus: European pharma has a lot of value, and underappreciated drug pipelines. What is keeping people on the sidelines is policy uncertainty. The Trump administration has taken an unconventional approach in using tariff threats and other measures to try to cut the Gordian knot of high drug prices and excessive healthcare expenses. Companies are striking deals one-on-one with the U.S. As that provides clarity, [the opportunities] become more interesting.
The U.S. market has become synonymous with Big Tech. What AI-related opportunities do you see in Europe?
Ali: Lithography is an important part of creating semiconductors, and there is only one company, Netherland-based ASML Holding, that does it. In Germany, we own a collection of companies that contribute to the semi ecosystem, such as Infineon Technologies.
Tech has been the most volatile theme in Europe amid the questions about the amount of capital spending going into sought-after chips. The concerns were most elevated earlier this year and still exist, but the AI theme is almost becoming too big to fail. The amount of effort and energy going into standing up data centers has given the AI theme a life of its own.
McManus: All roads lead through semiconductors and the companies that do things no one else can do, which isn’t reflected in the valuations of companies such as ASML.
One thing China can’t do is advanced lithography. That is what ASML provides. We value ASML using a combination of price/earnings multiple and discounted-cash-flow analysis, based on earnings per share for 2027 and beyond, because that is when the semiconductor industry will move to process nodes that will become increasingly lithography-intensive. That is a plus for ASML, whose EUV [extreme ultraviolet] lithography tools are highly profitable. One way to think about upside is that a price/earnings ratio of 30 times on 2027 earnings per share of €34 would yield a price of €1,020, or 15% higher than today—and growth is likely to accelerate further over the next decade.
It will be interesting to see if restrictions [on U.S. technology exports to China] get relaxed because China has the upper hand in trade negotiations and leverage with [its dominance of critical minerals] and rare earths. No matter what Treasury Secretary Scott Bessent says, it is going to take longer than one or two years [for the U.S. and allies] to build out a rare earths supply chain.
The U.S. has restricted the sale of certain ASML technology to China. How has that affected the company?
McManus: Last year, ASML had to cut its outlook for Chinese orders in half [because of the restrictions].
What non-tech beneficiaries of the AI theme look interesting to you?
Burdett: The hyperscalers are going to spend $550 billion to $600 billion a year on the data-center buildout, compared with $100 billion two or three years ago. McKinsey estimates that the incremental power needed for data centers over the next five years will be 126 gigawatts. By comparison, French utility EDF [Electricité de France] has 56 nuclear reactors that power about 75% to 80% of all French power, or 62 gigawatts—less than half that needed for AI and non-AI data centers.
This gets at the demand for power at a time when Europe has already been on an energy transition [toward renewables]. Utilities are our second-largest overweight. The energy transition results in more volatility in power prices. An integrated utility can make money from volatility because it has customers, generation assets, and distribution to move the power to where it’s needed.
We own Italy’s Enel, which trades for less than 13 times earnings. U.S. utilities trade for about 22 times. Enel has been trying to be more efficient and is buying back shares, while most U.S. utilities issue shares to fund operations.
Ali: Shareholder yield in Europe is 5%, much higher than in other markets. The aggregate demand for power over the next 10 years from all the data-center contracts on which hyperscalers are bidding is almost equivalent to the current power demand in all of the European Union.
Some of that has to be discounted, since everyone is bidding for multiple contracts and all of them won’t be approved. But European power demand is rising after having fallen for the past few years, and that’s a positive for utilities. Plus, because of climate change, there is more demand for air conditioning in Europe. And that’s a positive for utilities.
Burdett: We also own French telecom Orange, which trades at about six times enterprise value to Ebitda [earnings before interest, taxes, depreciation, and amortization]. The fourth telecom operator in the industry is struggling, so the other three—including Orange—have made an offer to buy the assets. We could get a quasi-consolidation in the market, which would help the competitive dynamic and lead to a better revenue pool.
Telecoms have been a graveyard for many years, mainly because of regulatory pressure. But as you think about self-reliance, digitalization, and the AI push, you need good networks to monetize all of that. Plus, Orange is going to buy out its Spanish joint venture, consolidating its Spanish business, which is also improving. You’re going to get a growing cash-flow stream over time in a market that is getting better.
What other positive catalysts are there for the broader European market?
Ali: European investors don’t own European equities as much as U.S. investors own U.S. equities. Less than 60% of European equities are owned locally, compared with more than 80% in the U.S. When we talk about European markets rising on the back of investment flows, it is largely foreign flows.
There is a conversation with asset managers in Europe and an effort to convince them to move clients’ capital out of bonds. The culture is one of risk aversion. Imagine the catalyst for European equities if Europeans adopt home bias.
Oneglia: There have been reports that the Germans, who tend to be risk-averse, are coming to the German stock market in greater numbers than previously.
One of the drivers [for foreign stocks] in the first part of the year was the view that erratic policy and some self-inflicted [tariff] damage in the U.S. could result in dollar weakness. The dollar sold off at the same time as the stock market as people tried to hedge themselves against the dollar risk they had piled up. There is a sense that the breakdown in correlation—declines in both the market and the dollar—was a one-off event.
We see a growing chance that people are interested in hedging against dollar risk. Because of the erosion of market institutions in the U.S., erratic policy, and the potential for inflation, we may see the dollar go lower, from a historically high level, over the next couple of years. That is another reason for diversification. This isn’t to say that people should divest from the U.S., but rather, where are you going to allocate the marginal dollar? We are skeptical of the view there are no alternatives to the U.S.
Thanks, all.
