European & Japanese Equities as Alternatives to US Equities

More traders are seeking alternative opportunities outside the US as market leadership narrows and headline risk grows. 

Investors (i.e., those with longer time horizons), meanwhile, are looking for better valuations and stronger diversification without sacrificing the regulatory stability and transparency that developed markets provide. 

Europe and Japan can be compelling because they offer a mix of reasonable valuations, global sector exposure, and the institutional strength many still prefer over emerging markets.

Key Takeaways – European & Japanese Equities as Alternatives to US Equities

European Market Positives

• Valuation Discount – European equities trade at a discount to their US counterparts, offering potential value opportunities. The forward P/E ratio for the European market (MSCI Europe index) generally remains under the S&P 500.
• Global Leaders in Select Sectors – Europe may not have the level of tech leadership as the US, but Europe is home to world-class companies in luxury goods, pharmaceuticals, industrials, and green tech.
• Resilient Earnings – Corporate profits have held up, signaling operational strength.
• Some Improving Macro Stability – Stabilizing energy prices and a more integrated fiscal/monetary backdrop.
• Higher Interest Rates Benefit Select Financials – Stronger banks are benefiting from improved net interest margins.

Japanese Market Positives

• Corporate Governance Reform – TSE-led push for capital efficiency is driving buybacks, dividends, and improved return on equity.
• Attractive Valuations – Many Japanese stocks still trade below book value (even despite recent rallies). Forward P/E ratios are around 16x.
• End of Deflation – Return of inflation and BOJ policy normalization are breaking decades-long stagnation.
• Weak Yen Tailwind – A weak currency benefits exporters. As such, exporters are benefiting from improved global competitiveness and earnings leverage.
• Domestic Demand Revival – Shift in consumer and business sentiment also supports internal growth, not just exports.
• Underowned by Global Investors – Japan remains underweight in many portfolios, which leaves room for capital reallocation.

European Market Positives

Valuation Discount

European equities are trading at a meaningful discount relative to their US counterparts in terms of forward P/E’s, offering a potential margin of safety for value-oriented investors.

The main trade-off is lower expected growth relative to the more tech-heavy US indexes.

Global Leaders in Select Sectors

Europe remains a global powerhouse in several key sectors.

It leads in luxury goods, pharmaceuticals, industrial machinery, and environmental technology.

These sectors offer strong global demand exposure, even if Europe lags behind the US in large-cap tech dominance.

Resilient Earnings

Despite energy shocks and geopolitical headwinds, European corporations have delivered earnings that exceeded expectations.

This speaks to the strength of their operating models and cost discipline across cyclical and defensive sectors.

Some Improving Macro Stability

While macro risks still exist, energy markets have stabilized and the European Central Bank has coordinated more closely with fiscal authorities.

The worst fears of a fragmented or energy-constrained Europe have not materialized, offering a more constructive backdrop for investors.

Higher Interest Rates Benefit Select Financials

Europe’s stronger, well-capitalized banks are finally seeing a tailwind from rising rates.

Improved net interest margins and more disciplined credit markets are starting to show up in earnings.

Especially true for northern European and pan-European institutions.

Japanese Market Positives

Corporate Governance Reform

A shift is underway in Japanese corporate culture, with regulators pushing for higher capital efficiency and shareholder returns.

Buybacks, dividends, and board transparency are all on the rise.

The Tokyo Stock Exchange’s emphasis on return on equity is catalyzing a more investor-friendly environment.

Attractive Valuations

Japanese equities still trade at compelling multiples, with many firms priced below book value.

Forward P/E ratios remain lower than most developed peers.

End of Deflation

After decades of deflationary pressures, Japan is seeing sustained price inflation — and that’s a good thing.

It signals a structural shift in behavior: consumers are spending, businesses are investing, and the BOJ is gradually normalizing policy.

This marks the end of a major psychological and economic drag.

Weak Yen Tailwind

A persistently weak yen has created a strong export advantage for Japan.

Major manufacturers and global brands are seeing earnings upside, helped by favorable currency translation and increased price competitiveness abroad.

Domestic Demand Revival

There are signs that Japan’s recovery isn’t just export-led.

Consumer sentiment is improving, wage growth is picking up, and service-sector activity has risen.

This all points to a more balanced growth story than in past cycles.

Underowned by Global Investors

Despite these improvements, Japan is still underrepresented in global portfolios.

Many institutional allocators are just beginning to revisit the market. 

That underownership creates space for re-rating if reform momentum continues and macro conditions remain supportive.