• Eurozone equities are supported by an improving earnings outlook, more supportive structural backdrop, and reasonable valuations. We therefore see further upside in our base case, but recommend a more selective approach to investing in the region for the time being, as we see with limited catalysts to drive the regional materially higher over the next couple of months. To reflect somewhat balanced nearterm risk/reward, we reduce European IT to Neutral.
• Following three years of stagnation, we reiterate our expectation of close to 25% earnings growth over the next two years, supported by a combination of secular growth drivers, corporate cost control, and a cyclical pickup in manufacturing.
• Our preferences in the region favor a combination of cyclical earnings improvers, structural growth opportunities, and beneficiaries of lower interest rates than current market expectations. This supports our preference for European industrials, consumer discretionary, health care, real estate, Germany, as well as our “Luxury & Lifestyles,” “European leaders,” and “Swiss high-quality dividends” themes.
Central scenario European equity performance over recent months has been driven by two main themes: AI-related investment and developments in the US-Iran conflict. While improving expectations on both fronts have supported the
market, leadership has been exceptionally narrow. Over the past three months, just 35% of MSCI EMU constituents have outperformed the index, the lowest share since our data series began in 2012.
Such narrow leadership cuts both ways. It increases vulnerability if either of these supportive trends reverses, but it also creates scope for laggards to catch up if market leadership broadens. In our view, this reinforces the case for further upside in European equities should energy flows through the Strait of Hormuz normalize, particularly as most sectors remain below their levels at the onset of the war. That said, the near-term backdrop is more mixed. The manufacturing recovery we have been anticipating remains intact but is likely to be delayed somewhat by disruption to energy flows.
Interest rates are also higher than we expected at the start of the year. In addition, following the strong rally in technology, further gains are likely to depend increasingly on execution rather than expectations alone. As a result, while we continue to see upside for European equities, supported by around 25% earnings growth over the next two years, we see fewer nearterm catalysts for another sharp leg higher and therefore expect the market to advance at a more measured pace over the next couple of months.
We reflect this more balanced near-term outlook by downgrading European IT from Attractive to Neutral. The sector is up around 40% since the start of the year, but we believe the price moves appear tactically stretched. Also, price-to-earnings valuations have reached highs not seen since the dotcom bubble in the early 2000s. The risk-reward therefore looks
less compelling to us, and executing on heightened expectations comes with risks given potential supply constraints. We are not pessimistic, but we see a more balanced risk-reward from here and favor a more selective approach to investing in the European IT sector, mainly via our AI TRIO. This TRIO manages exposure to the AI theme beyond the traditional MSCI
sector classification and offers flexible positioning in secular opportunities across the AI value chain.
Our preferences in the region favor a combination of:
1. Cyclical earnings improvers such as European industrials and consumer discretionary, including our “Luxury & Lifestyles” theme, with a current preference for high-end consumer stocks.
2. Structural growth opportunities such as European industrials, health care, Germany, and our “European leaders” theme, with a current preference for Europe’s leading companies in electrification and automation.
3. Beneficiaries of fewer rate increases versus market expectations, given our more dovish view on major central banks, which should support European real estate, and our “Swiss high-quality dividends” theme.
Upside scenario
EuroStoxx 50 June 2027 target: 7,400
• Investment boom drives a major earnings cycle, supported by investment intensive secular themes such as AI, electrification, and defense spending.
• European growth picks up more rapidly if energy flows quickly return to normal, potentially supported by German fiscal policy, EU defense spending, or European consumers spending their high levels of savings.
• A Russia-Ukraine peace deal can help improve sentiment in the region and possibly lower gas prices.
• More supportive global policy—for example lower-for-longer rates —or more supportive fiscal policy out of Europe, the US, or Asia could lift our earnings expectations and support valuations.
• Structural reforms make further progress—for example, defense spending beyond Germany, a more pragmatic approach to competition by the EU, or progress on the savings and investments union— drive better access to funding and more innovation in the long run, supporting higher valuations for European equities.
• US and Asian investors diversify into European assets, helping to close Europe’s valuation gap with US equities.
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