Valuation dispersion in 2025: Why quality growth is poised for a European comeback

The recent rotation into value and domestic stocks has created an extreme valuation dispersion between Value and Growth. Fund manager Mark Denham now believes this rotation is over-extended and we are observing Growth and Quality stocks trading at similar lows to 2022.

After underperforming U.S. equities for nearly two decades, European equities had a strong start to the year, suggesting the region is resurging. This recent upturn has been marked by a strong rotation into domestic and value stocks, leaving quality growth companies with solid fundamentals and long-term earnings potential, trading at historically low valuations.

This rotation has directly impacted the performance of Carmignac Portfolio Grande Europe which has a philosophy of investing in quality profitable companies who reinvest for the future. Despite, this recent short-term underperformance, we remain committed to our philosophy and investment process and believe in the potential for a comeback in quality growth as we see similarities with 2022, the last big rotation from quality to value. While the fund underperformed during this reversal, sticking to our process enabled us to return double digit returns the following two years.

As monetary conditions stabilise and earnings visibility improves, confidence in forward cash flows is being restored. This backdrop supports multiple expansion, especially for high-quality companies with durable business models and pricing power, creating attractive entry points for long-term investors.

Since 2024, investors have favoured European domestic stocks, particularly in banking, insurance, and industrials, as inflation remained sticky and interest rates elevated. Political instability in France and Germany, combined with weak Chinese demand, US tariffs and a stronger Euro, weighed on sectors typically associated with “Growth”, such as technology, and consumer discretionary.

The result was a divergence in performance: value led, while quality growth lagged, partially due to company fundamentals, but also driven by macro and trade-exposure headwinds. We view that gap as cyclical rather than structural.

We believe the rotation into value was underpinned by several factors:

Historical Inflation and ECB rates¹

Higher rates have strengthened banks’ profitability by widening net interest margins. Since the rise in interest rates above zero in Europe since 2022, domestic focused sectors such as Utilities and Telecoms, with no dollar exposure or tariff risk have been in favour.

In contrast, European growth companies with substantial US exposure, which we consider as global leaders, suffered from profit taking, with investors chasing domestic names with less exposure to the U.S. dollar.

Weakening US dollar and impact on exporters²

Year to date, the U.S. dollar has depreciated by more than 10%, marking one of its sharpest declines in decades. This weakness has been driven by rising political, fiscal, and trade policy uncertainty under the Trump administration. The resulting currency move has created a meaningful headwind for European quality growth companies with substantial U.S. dollar revenues, compressing reported earnings and margins in euro terms.

Similarly, tariffs have also disrupted European names with significant international exposure due to margin pressure, revenue risk, and subsequently investor sentiment. These factors have encouraged the relative appeal to domestically oriented sectors.

At a stock level, Novo Nordisk has been our biggest detractor, down roughly 40%. The main challenges for this company have been:

• Loss of market share in obesity drugs, with medics increasingly favouring Eli Lilly’s Zepbound over Wegovy.
• Illegal compounders selling copy-cat versions of both companies’ drugs, eroding market share until recent regulatory bans were implemented.
• A CEO change, a cut to FY guidance, and a setback in their Alzheimer’s drug programme.

Despite these challenges, we believe the stock is now oversold. At present, only approximately 3% of eligible US adults currently use obesity drugs, which is far too low in our opinion. We are also expecting Novo’s competitive position to improve, as likely being the first to market an oral version of the obesity drug by year-end.

In Healthcare, medical device companies such as Straumann (dental implants), Demant (hearing aids), and Alcon (eye lenses) fell 10–15%. Earnings were weighed down by cautious consumer spending; however, the underlying need for these products remains intact. We see this as deferred demand rather than lost demand.

The Consumer sector also struggled. Export-exposed names like Adidas were among our weakest contributors, despite strong fundamentals, with record Q3 results and operating profit up 23% year on year.

With greater scrutiny around growth stocks, we must ensure we are getting more value for the price paid for future earnings, and we have applied the disciplined approach we successfully used back in 2022, under similar market conditions. We have strengthened positions and added new holdings that score well on our filters, using current market volatility to purchase oversold high-quality names.

Overall, we have reduced our exposure to healthcare especially in Novo Nordisk, which we continue to monitor closely. We have added new positions in Financials, especially in banks such as BBVA, which now filter positively in our screens. We also continue to build positions in industrial names like Kion, SPIE, IMCD and Kingspan, which are all showing compelling valuations with strong secular growth prospects.

We believe quality growth companies are defined by high returns on invested capital, solid balance sheets, consistent earnings growth, reinvestment discipline, and durable competitive moats, representing attractive opportunities in the current environment.

Despite these attractive attributes, many of these high-quality companies have been penalised since 2024 due to both macro and micro related headwinds, along with investors’ preference for cheaper, domestic focused stocks. Yet, many of these names (especially in healthcare, technology, and branded consumer goods) have maintained or even strengthened their fundamentals. We believe this re-rating valuation offers a compelling opportunity to build positions in companies that show a leadership position in their sectors globally at attractive valuation levels.

The STOXX Europe 600 trades at a forward P/E of 15x, compared to 22x for the S&P 500, reflecting an approximate 30% discount. While most of the post-2023 recovery in Europe and globally has favoured domestic and value names, such as banking and industrials, these sectors have already experienced multiple expansion and now trade at or above historical averages. By contrast, quality growth companies, those with consistent cashflows, strong balance sheets, and structural earnings growth drivers, have been left behind valuation-wise, despite demonstrating strong earnings resilience through the macro volatility of 2024–25.

With markets reaching new all-time highs, the continuation of growth is naturally concerning. However, we are well positioned to benefit from any move as companies with stronger balance sheets and pricing power are best placed to defend margins across different market scenarios, making them attractive for the next phase of the cycle.

Within Europe, the valuation gap between European quality growth and value stocks is now at multi-year extremes, with quality growth names trading below historical averages, while value stocks have re-rated. This dislocation presents an attractive opportunity, especially as earnings stabilise and macro risks begin to ease.

P/E MSCI Europe Quality vs Value³

Several factors could trigger a rotation back into quality growth:

• Unchanged, resilient business models: European quality companies have strong moats and business models with pricing power, enabling them to withstand the current market environment.
• China stabilisation: Improved economic growth and renewed demand in China would benefit European exporters.
• Investor positioning: Europe remains significantly under-owned globally, with more than $150 billion in outflows since 2022.⁴
• Monetary easing: The ECB has already cut rates eight times, and more rate stability is expected from here, supporting growth-oriented sectors.

European markets offer numerous opportunities, including investing in undervalued European champions with strong international exposure, as well as sectors likely to benefit from these catalysts.

• The electrification theme: With Germany’s fiscal stimulus and it’s urgent need to upgrade their grid. We are well positioned to capture this upside through both domestic names as well as international players. Siemens, with a 17% domestic revenue exposure to Germany, and Schneider Electric, with its strategic alignment to Europe’s energy trilemma (decarbonisation, security of supply and affordability) and SPIE, an active player across the electrification value chain, including building and infrastructure solutions, grid and network services, e-mobility charging infrastructure and renewable integration. Prysmian, Europe’s leading provider of high-voltage cables, making them a key beneficiary of investment in upgrading infrastructure and improving interconnection between countries in Europe and beyond.
• AI beneficiaries: The data centre and AI investment boom is increasingly becoming a meaningful structural tailwind. ASML, the world leader in lithography is a direct beneficiary of AI-driven chip demand, with orders from global manufacturers like TSMC, SK Hynix, Intel and others, which gives us revenue visibility. We also see software names like SAP as AI beneficiaries that did not participate in the uptick seen in pure AI disruptive technologies. Over the medium term we expect the company to integrate AI applications into its dominant products and enhance revenue.
• Adding to high quality names: With quality names lagging in favour of value stocks, it is now an opportunity for long term investors to build back positions in consumer staples healthcare and selectively in industrial names that are currently at valuations reaching their 10-year lows or have derated. We have therefore been building positions in names such as Beiersdorf, Sartorius, and Kingspan which demonstrate these traits of long term winners.

The recent rotation into value and domestic stocks has created a mirage. One that obscures the enduring strength of Europe’s quality growth companies. With valuations at historic lows and fundamentals intact, the stage is set for a comeback. Investors willing to look beyond short-term noise may find compelling opportunities in the very names that were left behind.