Morningstar has published its Q3 European Equity Market Outlook, which finds that although volatility may persist in the quarter ahead, with tariff negotiations posing the potential to stir markets, opportunities are still emerging across sectors, particularly among small-cap stocks and select undervalued names in healthcare, luxury, and industrials.
“Tariff agreements between Europe and the USA remain unresolved. While compromises have been reached with the UK and China, Europe may still face the significant 25% levy outlined earlier this year. That said, potential market dips could unlock opportunities for savvy investors. European small-cap stocks are currently trading at a 30% discount, and undervalued prospects in sectors such as healthcare, luxury, and industrials set the stage for strategic investments.” said Michael Field, Chief European Market Strategist, Morningstar
Key takeaways from the report, authored by Michael Field, Chief European Market Strategist, include:
- Small-cap revival: Despite a strong Q2 rebound, European small-cap stocks are still trading at a 30% discount to Morningstar’s fair value estimates, making them one of the most attractive segments of the market.
- Valuation dispersion driving opportunity: Nearly half of Morningstar’s European coverage is currently rated 4 or 5 stars, with top ideas across sectors including healthcare and consumer. Every single sector has seen its valuation increase over the period, to varying degrees.
- Tariffs could pose a risk to European equities: Although Trump’s April tariff announcement sparked a sharp selloff, markets have bounced back quickly. While US trade policy remains a risk, Morningstar views recent UK and China-US compromises as a sign that a compromise is possible for Europe. However, should this deal not go to plan, we could see markets tumble.
- Macro picture stabilising: With inflation expected to fall below the ECB’s 2% target by 2026 and deposit rates now at just 2%, Morningstar expects a more supportive backdrop for equities in H2. European stocks are once again trading at a 5% discount to Morningstar’s fair value estimates.
