Plus, which countries and sectors look most attractive to invest in today.
In this bonus episode of The Morning Filter podcast, host Susan Dziubinski talks with Morningstar chief Europe markets strategist Michael Field about international investing. They discuss the market outlook for Europe this year and whether European stocks have any gas left in the tank after outperforming in 2025. Tune in to find out which European countries and sectors look most attractive from a valuation perspective today. They wrap up with three stock picks to buy in 2026 for the long term.
00:00:00 Welcome
00:01:50 2026 Market Outlook: Europe
00:03:42 Will European Stocks Outperform This Year?
00:07:35 Attractive Sectors to Invest In Today
00:14:13 Stock Picks for the Long Term
Read about topics from this episode.
Best International Companies to Own: 2026 Edition
Watch Michael Field's 2026 Outlook Webinar
Got a question for Dave? Send it to themorningfilter@morningstar.com.
Follow us on social media.
Dave Sekera on X: @MstarMarkets
Dave Sekera on LinkedIn: https://www.linkedin.com/in/davesekera
Facebook: https://www.facebook.com/MorningstarInc/
X: https://x.com/MorningstarInc
Instagram: https://www.instagram.com/morningstarinc/?hl=en
LinkedIn: https://www.linkedin.com/company/morningstar/posts/?feedView=all
Viewers who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. Subscribe to The Morning Filter to get notified when we post. We’ll see you next Monday!
Susan Dziubinski: Hello, and welcome to a bonus episode of The Morning Filter podcast. I’m Susan Dziubinski. Now, my co-host Dave Sekera and I have gotten a lot of questions from our audience about topics that you’d like to hear more about, and we hear you. So we’re doing some bonus episodes of the podcast, sitting down with various Morningstar experts to discuss topics that you want to hear more about. If you have an idea for a bonus episode, you can send it to us at our email address, which is TheMorningFilter@Morningstar.com.
Now, our bonus episode today covers international investing. International stocks outperformed US stocks last year, and we’ve gotten questions about whether that outperformance can last and where the opportunities are today. So, joining me to discuss the topic is Morningstar’s Michael Field. Michael is Morningstar’s chief Europe market strategist. And our conversation is taking place on Tuesday, Feb. 3. Welcome back to The Morning Filter, Michael.
Michael Field: Thanks for having me back, Susan.
Dziubinski: Now, I recently watched your 2026 Outlook webinar, which was really, really a great piece of research. And we’re providing a link to that webinar in the show notes, and I encourage everyone to watch it. Now, you noted in that presentation that the macroeconomic situation in Europe has been improving. Yet, despite good news on inflation and growth and interest rates, you say that uncertainty is on the rise. So explain that.
Field: I think it’s good to check in with this actually, because since we did that podcast, obviously even more has changed with the macroeconomic environment. It’s been the most volatile January that I remember, really. Some events, you know, like the Venezuelan president being brought into custody, don’t really have any effects on markets, necessarily. But other events, like threats towards credit card companies to freeze fees and things like this, really set the market thinking as to whether this disruption is going to be good or bad for business. So there’s certainly been a huge amount of process for markets. And I think that’s just a glimpse of the uncertainty that we’re probably likely to face over the course of the year.
Dziubinski: Now, Europe’s markets in general performed well in 2025. So, based on that, and based on the January you just referred to, how do valuations look today?
Field: So yeah, you’re completely right. Obviously, 2025 was a great year for equities in general, I would say. The US had a huge performance and so did Europe. The years started out pretty well, which is good for investors, but not necessarily good for valuations. Because in Europe, certainly right now, they’re right up with our fair value estimates, so what we think the market is essentially worth, which isn’t great news. But at the same time, there’s a huge difference between being fairly valued and being overvalued. And what I would say is, equities definitely aren’t expensive at the moment.
Dziubinski: All right, so then, given last year’s performance and that, you say, Europe in general is about fairly valued, do you think there’s still a case to be made for US investors to look to Europe for your opportunities? And, you know, just put another way, would you expect European markets to outperform the US market again in 2026?
Field: I think from a perspective of, should you be invested in Europe, the answer is certainly, yes. I think a lot of international investors, even European investors themselves, learned this lesson last year, at around “Liberation Day,” when announcements caused sudden shock waves through US markets, and investors suddenly saw the benefits of being diversified across other markets, even if it gives them similar exposure to the kind of end markets that they want. So I think certainly there’s a case for being invested in Europe. Yes, headline equity markets here are more or less fairly valued, but we’ll go into it later, there’s plenty of opportunities in specific sectors and styles if you’re looking for even more attractive upside. And in terms of the performance this year, obviously, I mentioned that markets are set up very well. Obviously, we’ve got the potential uncertainty and the volatility that that might bring over the course of the year. But the conditions that we’re looking at in Europe are far better than they even were this time last year. So there’s definitely a chance that we could have another strong year performance. You touched on inflation, GDP growth, interest rates low and coming down even further. And all of that bodes well, certainly, for equity markets this year.
Dziubinski: Now, Europe, of course, isn’t a monolith. So let’s look at some valuations on a country by country basis. Where would you say are the best opportunities at the country level today?
Field: That’s a very overlooked point as well, when people talk about Europe, that they don’t necessarily recognize that there may be some large differentials in valuations between countries, and possibly the opportunities aren’t the ones that you’d expect. If you look at Germany and the UK at the moment, they’re still flagging up as relatively attractive, still a few percent under our fair value estimate for those regions. But there’s another couple of countries, the Netherlands, where we’re broadcasting from here at the moment, and Denmark also, which are trading at the cheapest valuations in Europe. Some of that’s a bit of a fluke in that, the indexes, the components of those, just happen to be in sectors that are maybe trading a bit cheaper than others. Also exposure to some end stocks as well. ASML ASML in the Netherlands and Novo Nordisk NOVO B in Denmark, which have also kind of dragged down those indexes. But the result is the same in that we think both of those countries are actually looking quite attractive at the moment.
Dziubinski: OK, we’ll talk about sectors in a minute. I want to talk about small caps first before that. Now, here in the US, we’ve seen small-cap stocks stage quite a nice rally during the past few months. And as a result of that, the downside, there’s always a downside, is that they don’t look quite as undervalued relative to large caps as they did, say, a year ago. So what about small caps in Europe? Are they more or less attractive than large caps today?
Field: So there’s a lot of similarities sometimes between the US and Europe in terms of market movements, and small caps is definitely one of those areas that we see similarities. The gap last year between small caps and the general market was much, much bigger than it is today. And you’ve seen a rally in small caps, as you mentioned, both in the US and in Europe, over the last six months in particular, and that has closed the gap somewhat. But what I would say is that if you’re looking at small-cap stocks, the gap is still bigger in Europe than it is in the US currently. And that’s probably the most attractive style we see at the moment. And the fact that there’s some momentum there—people seem to be buying into the small-cap story, seem to be buying into the long-term longevity and health of the economy as a whole—is a pretty good sign for 2026.
Dziubinski: All right, well, now let’s talk about a few sectors where you see opportunity today. Now one is consumer defensive stocks, so why is this an attractive sector for investors?
Field: Consumer defensive stocks, the sector itself is an area that has a lot of, as the name would suggest, defensive qualities, right? It’s a sector that in the past has traded maybe closer to its fair value estimate because people look at these as big, safe, dependable companies. And then you’d expect valuations to be a bit more of a premium as a result of that. But what you’ve seen over the last few years is that, look, inflation was running really high. Not three years ago, it kind of touched on 10% in the US and in Europe. And that caused these companies a lot of bother. They were trying to pass through those pricing increases to consumers. Consumers had less cash in their pockets, and the volumes of goods that they bought decreased as a result. So that’s what’s kind of held these companies back over the last few years.
Dziubinski: Now, as you mentioned, the companies have been held back, but the stocks have underperformed, too. So, Michael, what do you see as sort of the way out here for consumer defensive stocks? What might lead that revival for the stocks in the sector?
Field: Some of it’s macro-related in that, lower interest rates. Certainly, in Europe, we’re at 2% now. And we could even have a cut this week. Probably not, but it could come soon anyway. So interest rates are a bit lower. Inflation has died down this week. Also, it’s expected to be below 2%. So those two factors together mean that one, people’s wages have more or less caught up with inflation, and they’ve got a bit more cash in their pockets to spend. But on top of that as well, maybe their mortgage payments are lower as well. And that all feeds into the same result again, more cash in their pockets. Consumers can certainly start to finally buy those brands that they wanted to buy and at the volumes that they wanted to buy them. So that’s one area of kind of where the macro is helping them. And then on the actual company side, the companies themselves, a lot of the big companies last year have started already to invest more in their branding and their marketing to try to get those consumers back, particularly some of those consumers that drifted towards kind of white-label goods. And for those companies that have already kind of begun that journey, they’re starting to see the results come through that already. So I think that bodes well for the other consumer defensive companies that are only just starting to invest more in their brands. It means that at some point this year, they might see those volumes pick up as a result. And that could help those stocks.
Dziubinski: All right. Another sector you like is technology. Now that might surprise some, given how well US tech stocks performed in 2025. How did you non-US tech stocks perform in 2025?
Field: So it’s definitely kind of a regional thing, as you pointed out, but it’s also a difference between what the companies do, right? And that the easiest way to split that out for people to understand is hardware and software. And if you look at what’s done well in the US, it’s very much the hardware companies, right? The Mag Seven, companies that are talking about chips and AI, and anything related to that, have done astonishingly well over the last number of years. But a lot of those software companies have been left behind. And that’s not a phenomenon that’s just existent in Europe. If you look at the US, some of the big names, Salesforce CRM, Palantir PLTR, even Oracle ORCL, for example, if you check out their share prices, it hasn’t been a pretty picture as well, particularly over the last six or 12 months. And in Europe, what we’re seeing is a lot of software companies have really struggled as a result. And what that kind of boils down to, if you will, is just investor lack of knowledge and investor sentiment being negative. And the feeling that they don’t know exactly which of these software companies and which of these products could be disrupted by AI. So they’re tarring everything with the same kind of negative brush, and that’s really dragged those share prices down.
Dziubinski: So then is it, is it a valuation story? Is that why you like tech for 2026?
Field: Certainly, valuation is one part of it. If I look in Europe, it’s one of the cheapest sectors in Europe, and it’s really hard to ignore that. But it’s also the case that we think a lot of these companies are very moaty still, that we think, when it comes to disruption, they’re very unlikely to be disrupted. So it’s more, perhaps, that the fundamental reasons behind the negativity, we believe, are wrong, which means that you could see a correction in those share prices sooner rather than later, is our hope, certainly, anyway.
Dziubinski: Now, your last sector that you like going into 2026 is healthcare. You think there’s opportunity there. Why?
Field: So I think this kind of comes back to what I spoke about consumer defensive as well. In the past, healthcare is seen as a very defensive sector, a lot of innovation there. You’ve had in the past kind of discoveries of drugs that have driven share prices to kind of massive highs. And that’s generally a sector that the investor sentiment is quite positive about, that people look at it and say, OK, it generates good cash flow, oftentimes pays good dividends. And you’ve kind of got this optionality around innovation, too. So you’ve got that growth element to it. So from that perspective, it kind of ticks all the boxes. But that’s not coming through in terms of valuations and share prices over the last couple of years. So what there’s been is a lot of overhangs. You had RFK’s appointment in the US causing some uncertainty as to what the government was going to back or not back in terms of kind of drugs and vaccines and things like this. You also had a lot of uncertainty from the administration in the US as well around tariffs around the sector. Whether that could change the profitability picture for a lot of pharma companies. But I think there’s been other factors as well, more investor-influenced around pipelines and whether the pipelines were strong enough, and the tail off in vaccines, was that going to be made up for by other drugs? So you had this kind of confluence of negative factors in that sector that all contributed towards those negative share prices we saw last year.
Dziubinski: Well, let’s wrap up today’s episode, just as we do every episode of The Morning Filter, with a few stock picks. One pick from each of the sectors that you just talked about, so we’ll start off with tech, where your pick is SAP SAP. Now, this stock fell pretty hard after earnings. So what happened?
Field: Ultimately again, it’s that uncertainty that we mentioned, right? SAP is now a 5-star name. A wide-moat stock, as are all three companies that we’re going to discuss today. But generally speaking, growth seems to be still quite high within the company. If you’re not familiar with it, one of the things they’re specializing is outsourcing of cloud technologies, right? Software as a service for corporate clients. And there’s obviously been a structural tailwind of companies physically outsourcing software to more cloud-based software. And they’ve been at the forefront of that. I think, you know, there’s some negatives from an operational perspective. They haven’t been as efficient as they could have been over the last number of years. And I think that’s certainly proving a drag on margins. But certainly, the growth seems to be still there in the company, but it hasn’t been enough to kind of remove those lingering doubts that investors have over that AI potential disruption that we spoke about.
Dziubinski: Now you mentioned a lot of these stocks are being tarred with the same brush. So, given that, why, specifically, is SAP your pick among all of them?
Field: Certainly, it’s one of the biggest in Europe anyway, and that’s a big selling feature, the kind of the pride of the German stock exchange, if you will, as well. But also, I think the degree to which it’s been hit, you mentioned the share price there, and it’s not often you see a large tech name of this size with 30% or more upside. I think that’s kind of one of the obvious things that strikes my mind when I think of SAP at the moment.
Dziubinski: All right. Well, your second pick is from the consumer defensive sector. It’s Diageo DEO. And actually, Diageo was one of Dave’s picks in 2025, too. Now, the stock was down more than 30% last year on weakened consumer demand. So walk us through the story here, Michael, and why you like the stock today.
Field: I’m not sure Dave will love that you’re highlighting that it fell after he’s recommended it. But I think what that says to me is that now is even a better time to buy the stock. And it’s one I actually own myself. And again, this comes back to what we spoke earlier about consumer defensive stocks, right? Diageo is this global name in spirits and in beer, the owner of Guinness, of course. And it’s one of these stocks that people, when we went through a slump in beer sales seven or eight years ago, this was one area that people talked up and said, well, young people are drinking more spirits now. And Diageo at the forefront of this. But everything’s cyclical and that’s kind of faded a little bit, too. And I think, you know, the structural trend here is, yes, people are drinking less. That’s well documented, but I think that’s been a long-term trend. And that hasn’t explained the share price fall to the degree it has over the last number of years. That comes back more to the story that we spoke earlier about inflation being high and people not being able to afford what they’d like to in terms of these kind of products. But certainly, with inflation falling, this company’s costs should be going down. And indeed, with people with more money in their pockets, with wages haven’t caught up, you should see a turn of fortunes for this. And I think this is again, one of those companies that’s globally diversified across brands and countries. So I think it’s in a pretty strong position. And when you see the valuation as low as this, that I think that’s a pretty good sign that now is the time to get involved.
Dziubinski: Now, Diageo has a new CEO as of Jan. 1. Any thoughts on what he brings to the table or changes he might make?
Field: So he comes with a solid reputation, having come from Unilever UL and the UK supermarket Tesco TSCO. And with the nickname of Drastic Dave, you can tell that something probably hopefully big is going to happen with the company. What yet is going to happen, we’re not fully aware of the details. But one thing that I would say is Diageo has a pretty big debt pile at the moment. It’s not unmanageable, but certainly it could be trimmed. And there’s a lot of things you could do there around the edges that could already have a benefit to the share price. And that’s kind of giving me some optimism, at least, with his appointment.
Dziubinski: All right. Well, your final pick this week is from the healthcare sector. It’s drugmaker GSK GSK. Now, compared to many of its peers, GSK stock has done pretty well during the past 12 months. Why is that?
Field: So I think, again, and again, another one I want to... I own myself for many reasons. So, yes, it has staged something of a comeback. You know, it’s been one of the best performers in the last year or so. I think the main reason is that it really there was so much negativity 12 months ago towards the sector and indeed that stock that something had to give. And if you recall GSK during the pandemic, it was one of the huge suppliers of vaccines, manufacturers and suppliers of vaccines. And really, that caused them some kind of consternation after the pandemic because you had this tail off in vaccine sales and you didn’t see that growth coming through to make up for what they were losing out in vaccine sales. And I really think that that caused some real negative sentiment towards the stock that people really didn’t really buy into that pipeline, that element that we spoke about earlier. And I think what you’re seeing now, finally, is those drugs coming through the pipeline, making up and overlapping the negative figures from vaccines falling off, which is certainly a positive. But also, I think it’s benefited from some of the other sectoral trends across pharma.
Last year, we were really concerned about tariffs, whether we could see 200% tariffs or more hit the pharma sector in general. And that seems to have all kind of bedded down. A lot of the pharma companies promised big things with regard to manufacturing in the US. And a lot of those kind of threats have gone away or a lot of that concern has gone away, and that’s helped the stock massively. But if you look today, it’s still paying a very healthy dividend. Cash flows seem good, innovation seems fine, and the debt seems very manageable as well. So all positive things in my eyes.
Dziubinski: Michael, why is GSK specifically your pick from the healthcare sector? Is it in part because of the momentum behind the stock?
Field: You’re completely right, Susan. That whole sector, as I mentioned, it’s trading at a discount to its fair value estimate in Europe. So I could have picked a whole host of stocks across pharma to highlight for you today. But I think if I had to pick one feature with GSK, it’s probably around the diversification that the stock offers. So, unlike other peers in Europe, like Novo Nordisk, which is exposed really heavily to GLP-1 drugs, GSK offers exposure to a whole host of different areas across the pharma sector. And what that does really then, is provide some stability and reliability going forward, which is a feature I think investors will probably be very happy to get in 2026, given how volatile the year could possibly be.
Dziubinski: All right. Well, Michael, thank you so much for joining me on our first bonus episode of The Morning Filter. We hope you’ll come back.
Field: Of course. Thank you.
Dziubinski: All right. Those who’d like more information about the stocks Michael talked about today can visit Morningstar.com for more details. I hope you’ll join Dave and I every Monday for The Morning Filter podcast at 9 a.m. Eastern, 8 a.m. Central. Happy investing.