Europe trades at about a 20% discount to the United States on a like-for-like, sector-neutral basis with the largest American technology companies stripped out. At the peak it was 40%.
The familiar story is that Europe is permanently cheap and stays that way. Marina Zavolock's argument is that the chart says otherwise: the discount broke a ten-year downtrend on 1 January this year, and when it breaks out like that, history says it keeps going.
"Nobody ever wanted to talk about Europe's cheapness before. Now, it's the first question you ask me."
Zavolock is chief European equity strategist at Morgan Stanley and works from London. Her firm's compliance line, read out on air, is that she cannot speak to single-name stocks or discuss political figures.
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👤 Guest: Marina Zavolock, Chief European Equity Strategist at Morgan Stanley, based in London
🎙️ Hosts: Tom Keene and Paul Sweeney, who anchor Bloomberg Surveillance
🧩 Other segments: George Noble, Managing Partner of Noble Capital Advisors; Dominic Konstam of Mizuho; and Sinjin Bowron of Beach Point Capital
📰 Published: 15 September 2026 on the Bloomberg Surveillance feed
🟣 Apple Podcasts | 🔗 Episode page | ⏱️ length not available
Key Takeaways
The like-for-like discount to the US is about 20%, down from 40% at its widest
Sector neutral, with the largest US technology companies taken out of the comparison
The discount broke a ten-year downtrend on 1 January, and her read of history is that it keeps narrowing to single digits
European aggregate earnings growth is running at 19%, with the median stock at 12%
Her explanation is inflation: Europe holds real assets and banks that benefit from it
About 15% of the index is direct AI capital-spending exposure, and European banks are outperforming US megacap technology
Two-thirds of Germany's infrastructure program is going to social spending, on her estimate
She wants quarterly reporting, because half of Europe's free-float market cap reports twice a year
1. A 20% Discount, Breaking Out
Keene asked how much cheaper Europe is than America, even after adjusting for the largest US technology companies, and whether it is the mother of all values.
The number is 20%, and she is careful about how it is built. "Now it's about 20% like-for-like discount, sector neutral, taking out Mag 7."
The peak was twice that. "At the peak, it was 40%. So it's not as extreme."
What she finds interesting is the trend break, not the level. On the long-term chart of the discount, "January 1st this year, we broke out. So we broke out of a 10-year downtrend."
The change in the conversation is her supporting evidence. "Nobody ever wanted to talk about Europe's cheapness before. Now, it's the first question you ask me."
And the historical analogue points one way. "And history suggests when we break out like this, we will keep going to single-digit levels of discount versus the US."
2. Inflation Is the Engine
Sweeney asked what is happening to European earnings, given that strong S&P 500 earnings growth has been the primary driver of US equity performance this year.
She conceded the comparison and gave the numbers. Not as strong as the S&P, "but it's very strong by European standards."
"So aggregate earnings growth for this year is now running at 19%. The median stock is doing 12."
The median comparison is the part she thinks makes the case. All of this is coming at a 20% discount to the US, and "The median isn't that dramatically lower."
Her explanation for both the growth and its durability is inflation. "Companies in Europe benefit from inflation because we have a lot of real assets and we have banks that benefit from inflation."
3. The Fiscal Story Faded
Sweeney asked whether the expected increase in European defense and infrastructure spending, much discussed at the start of the second Trump term, has actually happened.
"It is happening very gradually."
The enthusiasm has gone. There was a lot of excitement about it last year, she said, and "That excitement has faded."
Germany's infrastructure money is mostly not infrastructure. "The infrastructure spend in Germany, we estimate two-thirds of it is going to social."
Defense spending is real but behind plan. "The defense is happening, but running below target, it will pick up at the end of the year."
4. France and the Banks
Keene set up the French question around the widening German-French spread, and noted that Morgan Stanley's compliance line bars her from single names or political figures. She answered from the index instead.
She kept to what she has published and the market mechanics. She has written about it and would not go into political figures.
The exposure is smaller than it looks, because European companies are global. "So the proportion of stocks that are highly correlated to OAT spread widening is pretty low. It's a quarter of the index."
And a large part of that quarter wants higher yields. Within it sit the banks, which "actually benefit from higher yields."
Fast yield moves hit sentiment, not earnings. "But ultimately, when they report earnings, earnings are going to be strong. And they're already trading at a 20% discount."
Her team tested the pricing against history. They ran a case study of how stocks have traded around past presidential elections, and her conclusion is "We're already pricing a lot of negativity."
Investor behavior confirms it for her. On what investors are doing: "they're looking for idiosyncratic stories to buy because the market has kind of run ahead of itself."
On the currency she was direct about the asymmetry. A weaker euro historically annoyed dollar investors, but a stronger euro produces downgrades because European companies report in local currency and are heavily foreign-exposed. "So right now, it's not really a story, but generally, weaker dollar would be positive."
5. Europe's AI Exposure
Sweeney asked what the European corollary is to an AI trade that has driven so much of the S&P 500, given how few large technology companies Europe has.
She said it drives Europe too, and gave the breadth number. Earnings revisions breadth in Europe is "20% now" — again lower than the US but positive.
The leadership is the same as America's. "All of our AI is leading. So semis, cap goods, cap goods in Europe is now largely AI driven." Those, she said, are accelerating.
The direct exposure is measurable. "If you look at the weight of our index, we estimate about 15% is direct AI capex exposure."
The indirect exposure is the surprise. European banks, a large part of the index, "they're actually outperforming mega cap tech in the US" — partly because AI-driven yields are going higher, and retail banks in Europe benefit from that the way regional banks do in the United States.
Her bull case for Europe is adoption rather than production. Europe does not have as many technology companies, "but we have adopters", and return on investment is starting to come through.
That, she thinks, is the moment to wait for. When the returns arrive in force "I think it will be Europe's moment because we have so much low-hanging fruit in terms of potential for productivity improvements."
Bonus Insights
She wants European companies to report four times a year, not twice. Half of Europe's free-float market cap reports semi-annually, which she said creates a six-month vacuum of information, more volatility, and stocks that get left behind.
Her specific objection is a sequencing problem. Companies report sales and the stock squeezes on the back of them: "And then later on, you find out that they actually missed on earnings."
Asked who resists more disclosure, she did not take the bait and said only that she prefers more visibility.
Keene put the cultural version of the question to her — that European arrogance keeps the continent on a fixed-income-first model and undervalued forever — and she answered on the numbers: it is becoming less undervalued from an equities point of view.
The segment ended on Canary Wharf transport. Sweeney recalled needing multiple trains to get there and Zavolock confirmed the Docklands Light Railway now runs direct, before agreeing that Gatwick and Heathrow are much the same.
She would rather be in Paris. Asked whether she is based in London, Paris or Strasbourg, her answer was "I wish Paris, but London."
Zavolock's bottom line is that Europe's discount to the United States is closing rather than permanent: the ten-year trend broke in January, earnings are growing at 19% on inflation-linked real assets and banks, and the AI cycle reaches the index through capital-goods exposure and through yields rather than through a technology sector Europe does not have.
Products, Companies & Tools Mentioned
Morgan Stanley (Zavolock's firm and the source of the 20% discount, the 19% earnings growth and the 15% AI capex weighting)
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