European stocks have had a strong run, and that run is now making them harder to recommend without qualification. Madison Faller, a strategist at JPMorgan Private Bank, said investors should be more selective about European equities because improving earnings are increasingly reflected in current valuations.
The caution is grounded in performance data. The Vanguard European Stock Index Fund ETF rose 32 percent since the end of 2024, against just 12 percent for the S&P 500 over the same stretch. That outperformance compressed the valuation gap that made European stocks an easy buy at the start of the year.
The gap has not closed entirely. The Vanguard European fund trades at a price-to-earnings ratio of 18, versus 26 for the S&P 500. But whether that remaining discount is wide enough to justify broad exposure—or whether it simply reflects the structural weaknesses JPMorgan CEO Jamie Dimon outlined in his annual shareholder letter—is the question Faller's caution raises.
Dimon's letter described Europe as being on a bad path. He cited the continent's GDP falling to 70 percent of U.S. GDP, down from 90 percent in 2000, and attributed the decline to internal market barriers, bureaucracy and weak EU leadership. Dimon proposed a U.S.-Europe trade agreement as a structural remedy.
At the same time, JPMorgan Asset Management global market strategist Nick Gimber struck a more constructive tone, pointing to an interim U.S.-Iran peace deal set to be signed Friday as a factor cooling energy prices. Gimber said conditions feel like the market is turning a corner and identified selective opportunities beneath the surface of European indexes.
The divergence between Faller's caution at JPMorgan Private Bank and Gimber's selective optimism at JPMorgan Asset Management is itself informative. Both analysts converge on the same word: selective. That shared language signals the era of buying Europe as a broad trade on cheap valuations is narrowing, even among analysts at the same institution who hold different near-term views.
Separately, JPMorgan's equity team sees close to 10 percent total-return upside for the S&P 500 over the next 12 months and anticipates mid-single-digit returns for European large-caps. That projected gap—10 percent for the S&P 500 versus mid-single digits for European large-caps—gives the valuation math concrete stakes. If the earnings growth that drove Europe's 32 percent year-to-date gain moderates, the cheaper P/E ratio provides less cushion than it did when the rally started.
Other JPMorgan desks are moving in a more cautious direction on specific European sectors. The bank turned negative on EMEA mining and steel equities, warning that Middle East tensions weigh on metal prices and sector earnings. It also issued a string of rating downgrades on European chemicals stocks, cutting medium-term earnings forecasts on the view that a temporary lift from the Middle East conflict will reverse.
Those sector-level calls give Faller's selectivity message an operational form. Broad European exposure through a vehicle like VGK captures the entire index, including mining, steel and chemicals names that JPMorgan's own sector analysts are downgrading. Active filtering by sector and earnings quality becomes the mechanism for executing a selective approach.
Dimon acknowledged that Europe still has strong individual companies even as he outlined the structural decline. That acknowledgment aligns with what Faller is recommending: not an exit from European equities, but a disciplined screen that distinguishes companies with durable earnings from those benefiting from temporary tailwinds JPMorgan's analysts expect to fade.
Faller also said 10 of 11 S&P 500 sectors are expected to increase profits this earnings season, and that strong results from technology companies do not preclude broader earnings growth across the market. That framing matters for European positioning: if U.S. earnings breadth is widening while European sector-level upgrades are harder to find, the relative case for European exposure weakens at the margin.
The S&P 500 traded at 7,745 on Monday, down 0.5 percent on the session. European large-caps have outperformed the index by roughly 20 percentage points since late 2024, but with JPMorgan projecting mid-single-digit forward returns for that cohort, the arithmetic of a continued rotation into European equities depends entirely on which companies an investor holds—not on the trade as a category.
