Beyond the Magnificent 7: Why European Large Caps Offer Better Value, Higher Yields, and Lower Risk

While AI hype and the Magnificent 7's spectacular returns have dominated headlines, a quieter opportunity has emerged across the Atlantic. European equities now offer increasingly predictable cash returns, historically cheap valuations, and genuine diversification from technology concentration risk. For investors seeking income and value over speculation, Europe may be the overlooked alternative.

The Dividend Gap: 150+% More Cash Returns from European Equities

In an era of persistent inflation, dividend income has become more than a nice-to-have—it’s a critical component of real returns. European companies deliver substantially more cash to shareholders. In 2025, the companies in the STOXX 600 are estimated to have averaged a 3.3% dividend yield compared to just 1.3% for the S&P 500. That 2-percentage-point gap translates to over 150% more dividend income on every dollar invested. 

This dividend discipline spans industries. European companies in consumer goods (Michelin, Greggs), energy (Shell, BP), and communications (KPN, Orange) routinely yield 4% or higher. Even growth-oriented European firms issue dividends, providing returns through both cash payouts and share price appreciation. For long-term investors navigating today's volatile environment, this predictable income stream offers a compelling anchor that U.S. equities simply don't match.

Total Index Estimated Dividend Yield Comparison Chart

STOXX 600 (3.3%) vs S&P 500 (1.3%) on average for 2025

The underlying driver is structural. European corporate culture has long prioritized cash dividends as the primary mechanism for returning capital to shareholders, while U.S. companies have increasingly shifted toward share buybacks. On average for 2025, the STOXX 600’s estimated dividend yield was 3.3%, while that of the S&P 500 was 1.3%. Both approaches return value, but dividends can provide for more predictable, recurring income that buybacks may not replicate—a meaningful distinction for portfolios with spending requirements or income mandates.

A Historic Valuation Gap: Europe Trades at Half the Multiple

The valuation disconnect between U.S. and European markets underscores a significant opportunity. American stocks trade at a significant premium: the S&P 500 averages 25x earnings versus just 14x for the STOXX 600—an unprecedented 11-point gap.

S&P 500 vs STOXX 600 % Appreciation

As shown in the graph above, the S&P 500 has grown by over 600% since June 2009, while the STOXX 600 has managed a growth of only 160%. Those continued gains in the US, combined with already high valuations, have put the 2-year-average valuation difference between the two indices at nearly 11 times earnings—the S&P 500 has a 2-year average of 25x earnings while the STOXX 600’s 2-year average is 14x earnings, per Bloomberg data. 

Historically, this gap has never been this wide and a return to normal levels can signal there is more risk in the S&P 500 vs. the European Indices. This, in combination with the high dividend yields in Europe, can certainly suggest a higher return profile for European equities. It is important to keep in mind that many European firms operate globally, not just in Europe, meaning that slower European growth does not stop them from accessing new emerging markets or capturing market share in other regions.

Escaping Concentration Risk: Portfolio Insurance Against AI Dependency

Perhaps most critical is what European equities don't offer: exposure to AI mania. 

The S&P 500, along with other large U.S. indices like the Dow Jones (30) and particularly the NASDAQ 100, maintains heavy concentration in the technology sector, particularly the Magnificent 7. These firms have become increasingly interlinked through their shared investments in AI infrastructure, data centers, and Large Language Models—creating correlated exposure to AI adoption trends. If AI adoption disappoints market expectations, or if companies like Meta and Amazon scale back their massive data center spending, these indices face significant downside risk.

Most European large caps, however, are detached from the AI train. They're focused on more consistent growth in the more defensive markets. While many do leverage technology to further increase productivity gains, AI is not their make-or-break. Thus, for those seeking to lower the risk in their portfolios, and still achieve potential for attractive returns, European large caps can be an attractive opportunity.

The Investment Case: Key Takeaways

For investors seeking value, income, and diversification, European large caps present a compelling alternative to the concentrated U.S. market:

• Higher Income: European equities yield 3.3% on average versus 1.3% for the S&P 500—152% more cash returned to shareholders

• More Attractive Valuations: The STOXX 600 trades at 14x earnings compared to 25x for the S&P 500—the widest gap in history

• Diversification from Tech Concentration: European large caps offer exposure to defensive sectors and global operations without the correlated AI dependency risk of U.S. indices

• Global Revenue Streams: Many European firms operate worldwide, accessing emerging markets and growth opportunities beyond the European continent

• Predictability in Returns: Dividend discipline embedded in corporate culture provides stable, growing income streams through market cycles

While the Magnificent 7 dominates headlines, European equities may offer what many portfolios increasingly lack: measurable value, consistent income, and diversification from technology concentration risk.

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For More Information

Institutional investors interested in learning more about the Lucerne European Income Select Fund, see our introduction video or contact us:

Thijs Hovers

Lucerne Capital Management, L.P.

Email: th@lucernecap.com

Phone: +1 (203) 983-4400

General Inquiries: irelations@lucernecap.com

73 Arch Street

Greenwich, Connecticut 06830