Key takeaways
A broader bull market is emerging: European equities continue to perform largely as we expected, supported by a stronger-than-anticipated earnings season and improving macro signals. The market is no longer reliant on a narrow group of AI enablers or banks. Upward earnings revisions are broadening across multiple sectors and industry groups, creating a healthier and more durable backdrop for performance. Consensus now expects close to 18% EPS growth for Europe this year, a stark contrast to the previous three years when aggregate earnings growth was effectively absent as winners and losers offset each other.
AI remains the most important earnings story: The strongest earnings upgrades continue to come from AI beneficiaries, where revisions during this reporting season have again exceeded those seen in the previous two quarters (an acceleration of positive revisions). European AI enablers, electrification and selected renewables remain among the highest-ranked themes in our framework, supported by strong earnings momentum and sentiment. However, leadership is broadening beyond AI alone as industrial and financial sectors increasingly participate in the upgrade cycle.
We are rotating further toward financials and industrials: This month we remove Energy and Materials from our highest-conviction list and upgrade Diversified Financials and Capital Goods. The change reflects a combination of improving earnings revisions, attractive valuations and strengthening macro signals. Diversified Financials, Banks, Insurance and Capital Goods all rank favourably in our REVS framework, while fiscal spending, infrastructure investment and an improving industrial cycle continue to create opportunities beyond traditional AI beneficiaries. Stocks such as IG Group, ACS, Rockwool, Prysmian and SPIE fit particularly well with this evolving backdrop.
PMIs are finally confirming the earnings story: One of the most encouraging developments is that PMI trends are no longer signalling weakness or even neutrality. New orders indicators have pushed decisively above 50 in several large sectors, with some of the strongest improvements coming from banks, pharmaceuticals and industrial businesses. After much of the last three years being characterised by offsetting sector trends, we are now seeing both earnings and activity indicators improve simultaneously across a broader share of the market.
Preferred defensives are changing: We remain positive on pharmaceuticals where growth has turned after valuations cheapened. However, several consumer-oriented areas are seeing deterioration. Retail, Food Retail, UK Consumer and Healthcare Equipment & Services move onto our least-preferred list this month, reflecting weakening earnings momentum and poor REVS rankings. By contrast, Food, Beverage & Tobacco and Household & Personal Products improve sufficiently to leave the least-favoured category, even if we do not yet see a compelling catalyst for outperformance.
Geopolitical and policy risks are becoming tailwinds rather than obstacles: The Iran conflict and related energy-market disruption have not created the sustained earnings shock many feared, even though European gas storage levels remain uncomfortably low. Fiscal policy momentum across defence, infrastructure and industrial investment continues to build, particularly in Germany. With energy supply concerns possibly easing and policy support strengthening, investors appear increasingly willing to focus on earnings delivery rather than macro risks.
Positioning remains supportive: Investor positioning in Europe is still relatively light compared with other major markets. While active inflows remain subdued, passive flows and ETF allocations have begun to improve after a prolonged period of weakness. Combined with still-moderate crowding levels across most sectors, this suggests that stronger earnings delivery could continue to attract incremental capital into European equities during the second half of the year and drive the Stoxx 600 to our target of 690. Consensus single-stock target prices continue to rise – approaching a level of 750 for the SXXP on what we think is probably a nine-month duration.
Our highest-conviction stock ideas: We continue to favour concentrating on AI and industrial infrastructure beneficiaries such as Prysmian, ACS, SPIE, Elia and Rockwool, alongside defensives with improving earnings momentum including Merck, Bayer and UCB. At the other end of the spectrum, Healthcare Equipment, Retail and selected UK consumer exposures continue to generate some of the weakest signals in our framework.
The four reasons for Stoxx 600 upside
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