Europe has long traded at a valuation discount to the US, visible across simple headline metrics such as P/E and P/B. What is more striking is that, even in 2026 and even after periods of strong performance in European indices, the discount remains wide enough to keep resurfacing in allocation discussions. So, the question is not whether Europe is “cheap” in relative terms, but whether the discount is beginning to look excessive in relation to the region’s earnings outlook and balance-sheet resilience, or whether it still reflects deeper, structural differences that are unlikely to disappear.
After the inflation shock of 2022 and 2023, price pressures have finally started to cool. Inflation has not disappeared, but it has slowed, and that phase is known as disinflation. Prices are still rising, just not at the pace that unsettled households, policymakers, and markets a couple of years ago.
Picture this scenario: a central bank raises interest rates, yet the currency weakens instead of strengthening. It sounds counterintuitive, but seasoned traders know it’s not the rate hike itself that matters – it’s what the market expected to happen next. FX markets are forward-looking by nature, meaning they focus on where rates are headed rather than where they stand today.
Investors have spent the past two years in a will-it-or-won’t-it debate, wondering if economic growth could really hold up while inflation cooled off. Central banks have been trying to control inflation without triggering a recession, and as price pressures ease, markets keep asking: is this time different?
