The P/E gap between U.S. and European equities has narrowed from a record 9.0x to 4.7x. The target is 4.3x. What closes that final distance is not more time — it is Germany catching up to its own reform agenda. In their September 2026 report, "MEGA II — Not Done Yet,"1 Maximilian Uleer, Carolin Raab, and Francesca Mazzali of Deutsche Bank Research Institute argue that the decisive leg of Europe's re-rating belongs to a single economy whose transformation has been real, extensive, and systematically underpriced by markets.
The Valuation Gap Closes — Sector by Sector
When Deutsche Bank made its original MEGA call in early 2025, the U.S. technology sector accounted for the bulk of the P/E premium over Europe. That is no longer the case. "The valuation premium no longer stems from the IT sector," the team notes. In the IT sector itself, the U.S. now trades at only a modest forward P/E premium. But every other U.S. sector — Real Estate, Consumer Discretionary, Consumer Staples, Energy, Industrials, Financials, Communications, Health Care, Utilities, and Materials — trades at a higher multiple than its European equivalent.
This matters because the original thesis was sometimes dismissed as a technology-skew argument in reverse. That escape hatch is closed. European equities are cheaper than American equities across the board, and the earnings outlook supports that re-rating continuing. Uleer, Raab and Mazzali expect European earnings to deliver "double-digit growth in 2026," with the STOXX 600 consensus pointing to 15% aggregate growth for the year. Almost all sectors are participating — Energy at 75%, Basic Resources at 48%, Technology at 25% — with only Travel and Leisure projecting a contraction.
Concentration Is the Risk Markets Are Not Pricing
One of the most arresting data points in the report concerns what market concentration does to drawdown risk. The seven largest companies in the S&P 500 represent 35% of index weight. In the STOXX 600, the equivalent figure is 15%. Strip the top seven out of each index and the five-year return picture reverses: the S&P 500 ex-top-seven delivers roughly 8% average annual total return; the STOXX 600 ex-top-seven delivers roughly 10%.
The historical drawdown data makes the same point in the opposite direction. In 2022 and again in 2025, the S&P 500 experienced materially worse maximum drawdowns than the STOXX 600. "When the US sneezes, Europe says Gesundheit," the team writes — inverting the old conventional wisdom that European markets were more fragile. The top seven U.S. companies also contributed 53% of all S&P 500 earnings growth since 2021. That kind of concentration is productive on the way up and punishing on the way down, and advisors building portfolios for the next cycle should treat it as a structural variable rather than a market quirk.
Germany: Where the Arrival State Is Named
The report's Germany section is the most detailed and the most forward-specific, and it is where the GSMU discipline matters most. The team is not arguing for a return to something. They are arguing for something that has not yet existed in its current form. "Germany has the potential to become the driving force behind Europe's economic revival," they write.
The fiscal foundation is documented with precision. Germany is the only G7 country to have reduced its debt-to-GDP ratio over the past decade, cutting it by 8 percentage points while the U.S. ratio rose 18 points and Canada's by 19. That discipline created the fiscal capacity for what is now underway: approximately €1 trillion in additional debt planned by 2030, with defence and investment spending hitting roughly €120 billion this year — up more than 30% year-on-year. Net credit borrowing rises from €180 billion in 2026 to more than €200 billion in 2027. This is not a promise. It is a budget.
The macro data is confirming the thesis in real time. Germany's manufacturing PMI climbed above 54 in August 2026 — its strongest reading in over four years. Factory orders are edging higher. H1 GDP growth exceeded expectations. The Deutsche Bank Germany economic surprise index has reached its highest level since 2021. "The German economy is more resilient than expected," the team states, and consensus 2026 GDP forecasts have since been revised upward.
The reform agenda is comprehensive and in motion. Across economic growth incentives, energy prices, pension systems, labour market flexibility, infrastructure approvals, and bureaucratic reduction, the German government is implementing structural changes on multiple tracks simultaneously. The pension reform alone is a catalyst worth examining closely. The introduction of a new private savings account ("Altersvorsorgedepot"), the wind-down of the Riester system, and the introduction of a funded statutory pension component could together generate "€60–100bn of additional annual capital market inflows." Of that total, the team estimates "around €10–15bn (15%) may find its way into European equities" — against a backdrop where the top 50 European ETFs saw combined inflows of roughly €40 billion in all of 2025.
The MDAX Is the Instrument, Not the DAX
The most specific portfolio implication in the report is the MDAX over the DAX. The DAX derives only 19% of revenues from Germany. The MDAX derives 30%. The MDAX's performance historically tracks German GDP growth far more closely. And since January 2022, the MDAX has underperformed the DAX by 71% in total return terms. It now trades at the cheapest level relative to its own history on a forward P/E basis.
Despite this, investor flows into the MDAX remain depressed. The team characterizes the last eighteen months as a "rollercoaster of emotions" — initial excitement after Germany's election and fiscal stimulus announcement, a wait-and-see plateau, disappointment at the pace of implementation, a re-acceleration, and most recently a pullback driven by Iran-related geopolitical concerns. The MDAX has lagged the STOXX 600 by 2% since the end of June. "Bring patience to benefit from the recovery," the team advises.
The Fiscal Risk Comparison Favours Europe
One counterargument to the Europe thesis that the report addresses directly is fiscal risk. Germany is taking on significant new debt. Does that not create vulnerability? The answer, documented with IMF projections, is no — at least not relative to the U.S. Despite Germany's planned €1 trillion expansion, the IMF projects Germany's debt-to-GDP to reach 72% by 2030. The U.S. is projected to reach 139%. The Eurozone's fiscal balance is deteriorating more slowly than America's, and the convergence between U.S. and European fiscal risk profiles is, itself, a structural reason to expect the valuation premium the U.S. has historically commanded to continue narrowing.
Five Key Takeaways for Advisors and Investors
- The P/E gap is at 4.7x and the target is 4.3x — check this number quarterly. The original Deutsche Bank forecast of P/E convergence from 9.0x to 4.3x is nearly achieved. Monitor the 12-month forward P/E differential between the S&P 500 and STOXX 600 as a scoreboard for the remaining distance. The final 0.4x will be driven by Germany's earnings re-rating, not passive multiple compression.
- The MDAX is -71% vs. the DAX since 2022 and trading at a historical valuation low — this is a defined decision point. Advisors reviewing German equity exposure should assess whether their holdings reflect DAX-level international revenue exposure or MDAX-level domestic recovery exposure. The MDAX is the purer instrument for Germany's specific reform and fiscal pivot thesis.
- European pension reform creates a datable, quantifiable flow event. The German private pension account ("Altersvorsorgedepot") becomes effective January 1, 2027. Mark the date. The statutory pension funded component begins building from 2028. Advisors with clients in European equity products should understand that €10–15 billion in potential annual inflows into European equities is a structural demand driver arriving on a known timeline.
- U.S. equity concentration at 35% in seven names is a risk variable, not a talking point. When the top seven companies are removed from the S&P 500, the five-year average annual return drops from 16% to 8%. When removed from the STOXX 600, the equivalent return holds at 10%. This is a number advisors can use in portfolio review conversations to explain why European diversification is not a consolation prize.
- Germany's manufacturing PMI above 54 is the macro confirmation signal — watch for it to hold. A sustained manufacturing PMI above 50 in Germany historically correlates with positive earnings revisions, improving factory orders, and eventual equity re-rating. At 54 in August 2026 — its highest in over four years — the signal is live. If it holds through Q4, the macro foundation for the MDAX recovery becomes considerably harder for the market to continue ignoring.
Current position: The European re-rating has covered most of its expected distance, with the P/E gap at 4.7x against a 4.3x target. Germany's fiscal pivot is confirmed in the budget, visible in the PMI data, and structured into the reform legislation. The MDAX has not moved. Named trigger for change: Sustained manufacturing PMI above 50 through Q4 2026, combined with the first pension reform implementation date of January 1, 2027, sets a defined window for the market to close the gap between Germany's improving fundamentals and the MDAX's historical underperformance.
Footnote:
1 Uleer, Maximilian, Carolin Raab, and Francesca Mazzali. "MEGA II — Not Done Yet." Deutsche Bank Research Institute, 15 Sept. 2026.
