Key Takeaways
- The European stock markets began 2025 undervalued by almost 10% and ended the year slightly undervalued.
- The US stock market is currently slightly cheaper than the European market thanks to the fair value update of some large American companies in the last quarter of 2025.
- Real estate and consumer cyclical are the most undervalued sectors in Europe, while financials and utilities are the most overvalued.
European investors had a good year in 2025, with the Morningstar Europe Index gaining 19.4% in euros, significantly outperforming returns of 8.7% in 2024 and 15.5% in 2023. Still, there were differences on a country level: The Spanish market was the most profitable in 2025 with a return of 57.3%, while the French stock market was the worst performer, gaining 13% in euros.
Individual European stock markets all began 2025 trading in undervalued territory and some then ended the year in overvalued territory: As of Dec. 31, only seven markets still had a price/fair value ratio below 1. Overall, the Morningstar Europe Index was just undervalued at the end of 2025, trading at a price/fair value of 0.98, having started the year 10% undervalued. By the end of 2025, the European market was the most expensive in the past three years.
At the end of the year, the Morningstar Europe Index was more expensive than the Morningstar US Market Index. This was not because the European index rose more than the US index in 2025—the Morningstar US Market Index gained 17.4% in US dollars—but because of the rise in fair values for some of the large companies in the US index, which has lowered the valuation of the market as a whole. This was the case for NVIDIA NVDA, whose fair value was increased from USD 190 to 240, Apple AAPL (from USD 210 to 240), Amazon AMZN (from USD 245 to 260), and Alphabet GOOGL (from USD 237 to USD 340). In Europe, in contrast, there were no major valuation revisions for the large companies in the index during the last quarter. The most striking revision was that of ASML Holding ASML, whose fair value was hiked from 820 to 850 EUR during this period.
Most Overvalued and Undervalued European Stock Sectors
At the sector level, there were no major changes since November. The financial services sector remained the most expensive in terms of valuation, with a price/fair value ratio of 1.12. The second most expensive sector was utilities, with a price/fair value ratio of 1.04. Here the three largest companies in the sector ended the year with very different valuations: Spain’s Iberdrola IBE was overvalued by 20%, Italy’s Enel ENEL was overvalued by 10%, and the UK’s National Grid NG. was undervalued by 6%.
Apart from real estate, one of the cheapest sectors last year was consumer cyclical, with a price/fair value ratio of 0.91. In this case, the high overvaluation of companies such as Hermes International RMS (P/FV of 1.34) and Inditex ITX (1.36) was more than offset by the steep undervaluation of Prosus PRX (0.66).
Although most European sectors saw their price/fair value estimate increase throughout 2025, this was not the case for the technology, industrials, and communication services sectors. The technology sector failed to see its price/fair value increase despite the rise in ASML.
