Key Takeaways
- The European market is trading at a 4 per cent discount, which means it is slightly undervalued.
- The upward revision to ASML’s fair value means that technology is now the cheapest sector in Europe.
- The strong return of oil companies in July has pushed the sector into overvalued territory, Morningstar data shows.
European stocks remained modestly undervalued at the end of July, with the Morningstar Europe Index trading at a price-to-fair-value ratio of 0.96 as of July 31. This means the index was 4% below Morningstar’s estimate of fair value, suggesting that European equities still offered some valuation support despite their strong performance in recent months.
European stock markets continued rising in July with a gain of 1.3% in euros despite the ongoing conflict in Iran and following a strong second quarter in which the Morningstar Europe Index rose 11.3%.
The differences in returns between the various European stock markets were, however, greater than usual. The Morningstar Norway Index was the top performer last month as it rose 9.2%. That’s a big change from the prior month, when the index fell 9.4% and was the bottom performer across European stock market indexes.And in July, the Morningstar Netherlands Index suffered a loss of 8.4% as we mentioned here.
These results had a significant impact on valuations across the various European markets in July. The aggregate price-to-fair-value ratio of the Norwegian stock market rose to 1.05 from 1.00 over the course of the month. The change in valuation was even more pronounced in the case of the Dutch stock market, where the weighted average price-to-fair-value ratio fell to 0.81 from 1.11, making the Dutch market the cheapest in Europe. The most expensive one remains the Spanish market, with a weighted-averages price-to-fair-value ratio of 1.22.
The Most Overvalued and Undervalued European Sectors
There have been three significant changes to the valuations of European sectors between June and July. The first concerns the technology sector. Our Morningstar analyst, Javier Correonero, has revised ASML’s ASML fair value upwards to EUR 1,800 from EUR 1,200. He says. He says: “We expect 2026 and 2027 sales of EUR 44 billion and EUR 56 billion, respectively. The medium-term outlook has improved meaningfully since the summer of 2025, and ASML is positioned to expand Low-NA EUV (low numerical aperture extreme ultraviolet) and DUV (deep ultraviolet) immersion capacity by up to 70% from 2026-28. While our previous 2030 revenue forecast was anchored to the top end of ASML’s long-term guidance of EUR 60 billion, this number now looks irrelevant, as we estimate ASML could deliver close to EUR 70 billion in revenue and EUR 69 in EPS already in 2028, even without fully utilizing its expanded capacity.”
With this change, the technology sector is now the European sector with the most attractive valuation. At the end of July, it was trading at a price-to-fair-value ratio of 0.78, meaning it is undervalued by 22%.
The second sector is the energy sector, which has risen to a 2% premium in July after trading at an 11% discount in June. In this case, there has been no revision of the fair values of the major oil companies. Rather, the rise in the sector’s valuation is due to its strong performance in July, a month in which the Morningstar Europe Energy Index gained close to 14%.
The real estate sector also saw a significant change in its valuation, with the price-to-fair-value ratio rising to 0.90 in July from 0.79 in June. The reason is that Morningstar has initiated coverage of Vonovia VNA, the German residential REIT, which is the largest real estate company in the Morningstar Europe Index, with a price-to-fair value of 1.11 at the end of last month.
Apart from the energy sector, there are two other sectors trading in the overvalued territory: basic materials with a 3% premium and finacials with a 7% premium.
Stocks in Europe Look More Expensive Than Their US Counterparts
The European market has outperformed the US market in recent months, driving European stock valuations upward by comparison. The Morningstar Europe Index has gained 6.9% in euros over the last three months, compared with a 4.3% gain in USD for the Morningstar US Total Market Index.
Another factor has been that the Morningstar fair value estimates for some large American companies have been revised upward during July, including Amazon AMZ to USD 300 per share from USD 280, JPMorgan JPM to USD 320 from USD 311 and Advanced Micro Devices AMD to USD 530 from USD 450.
The Morningstar Europe Index now has a price-to-fair value ratio of 0.96, which means that it is 4% undervalued, compared to a ratio of 0.92 for the US market.
What Is the Morningstar Price/Fair Value Ratio?
The price/fair value ratio measures whether a stock is cheap or expensive by dividing the price of a stock by Morningstar analysts’ fair value estimate as of the most recent market close. A ratio above 1 indicates the price is higher than Morningstar’s estimate of its fair value; a ratio below 1 indicates that it’s lower.
