As the EUR/USD pair continues to move higher, showcasing the Euro’s dominance for months now, a natural question arises: how reasonably are EU stocks valued when considering current EUR/USD rates? The answer to this question is crucial for both traders and investors, as it defines how attractive EU stocks are to investors. If they are overpriced, then investing in them would be a bad idea, and if they are undervalued, then it might be a good idea to look for long entries. Let’s analyze important factors behind the EU stock prices and conclude how well they are valued in the broader context of the EUR/USD rate.
Valuation Context
The Euro to dollar rates have been steadily increasing over the past few months, showing the robustness of the euro. This rise in rates was not coincidental and has deeper roots in macroeconomics. Despite this rapid trend development, European stocks trade at a lower forward P/E than their U.S. counterparts. For example, Euro Stoxx 50 trades at around 15x forward earnings, versus 20x for the S&P 500. The Price-to-earnings (P/E) ratio is an important measure as it reflects how much investors are willing to pay for a company’s earnings. So, when we say European stocks trade at a lower forward P/E, it simply means investors pay less for each euro of expected earnings compared to many US equities. This is already an important hint that EU stocks are probably undervalued. Meanwhile, dividend yields in Europe are higher on average than on the S&P 500. What this indicates is that the US stock market is overvalued and investors are often paying more than what the companies actually deliver.
Macro Backdrop
BBVA Research estimates the euro is near equilibrium and the dollar is overvalued, meaning current EUR/USD reflects a relatively weak dollar, not an overpriced euro. This is important information, as this current trend is not caused by the euro’s strength but by the weakness of the dollar. As investors and traders discover these clues, it becomes apparent that the dollar can experience an unwind of its overvaluation, which can theoretically push EUR/USD even higher towards the 1.20 price mark. This will surely support European equity returns and strengthen the EU’s stock markets. The capital inflow into EU bonds will also become strong as investors seek safe-haven assets to counterbalance a weaker dollar.
Recent Market Developments
European stocks outperformed early in 2025, but they slowed, and EU and USA equities converged in July. This was mainly driven by strong earnings in energy, industrials, and financials. Despite that, exporters face headwinds from euro strength, as it makes prices higher for companies relying on EU resources. The STOXX Europe 600 and S&P 500 returns had largely converged as year-to-year gains were similar at around 6.8%. Despite this convergence and currency headwinds, the overall sentiment is optimistic among both analysts and investors, pointing to solid corporate earnings, better profit margins, and reasonable P/E ratios, which are still below the U.S. valuations. These factors create strong support for European equities to show even stronger performance.
Final Verdict: Are Eu Stocks Overvalued?
Overall, at the current EUR/USD exchange rate, European stocks are not overvalued. Despite the euro’s recent rise, valuations remain attractive when compared to U.S. stocks. Lower forward P/E ratios, higher dividend yields, and solid earnings performance support EU stocks and make them reasonably or even slightly undervalued. The euro itself is near fair value, the dollar is still considered overvalued, and the macro backdrop also supports continued strength in European equities.
All this indicates that current valuations and economic context all point to opportunity rather than overpricing.
