European Stocks Present Modest Upside Despite Valuation Concerns

Goldman Sachs strategists have signaled a modest upside for European stocks, even as the market continues to show strong performance forecasts for 2025. In a recent note, Guillaume Jaisson and his colleagues highlighted that while Europe now trades at a forward P/E of 14.2x—slightly above historical averages—it still commands a larger-than-average discount relative to the U.S. market.

The report emphasizes that domestic and cyclical sectors remain relatively inexpensive given their profitability, and there is considerable potential for earnings-per-share growth. The team expects EPS to expand at a rate exceeding their current estimates of 3-4% per year over the 2025-2027 period.

However, the strategists also outlined several downside risks, including declining U.S. growth, potential legislative obstacles to fiscal spending, and rising European bond yields. Despite these challenges, Goldman Sachs maintains a long position on stocks tied to defense and fiscal infrastructure, underscoring their belief that investments in these areas will benefit from continued fiscal support and long-term growth trends.