A recent Bank of America survey has uncovered a notable shift in investor sentiment, with nearly half of fund managers now favoring European stocks over their US counterparts. Approximately 47% of respondents anticipate that European equity returns will modestly outperform US equities over the coming year, marking the highest level of optimism since the onset of the Iran conflict in February 2026. This renewed confidence signals a significant rotation in global investment strategy as the European economic landscape demonstrates greater resilience.
The foundation for this optimism appears solid, with an overwhelming 97% of survey participants indicating they do not foresee a European recession, a level of confidence not seen since 2007. Furthermore, more than three-quarters of respondents believe that any future stock market gains will be primarily driven by upward revisions in earnings expectations. Strategist Andreas Bruckner noted that investors are revisiting their bullish European thesis from earlier this year, a narrative that was abruptly interrupted by geopolitical tensions. European markets have been reaching new highs this month following their strongest quarterly earnings performance in nearly four years, with Stoxx 600 index components projected to report a 22.4% year-on-year earnings increase for the second quarter, the fastest growth rate since the third quarter of 2022.
Data reveals that MSCI Europe index profits have climbed 14%, with more than half of its constituents beating expectations, both metrics representing the strongest figures since early 2023. A Citigroup index highlights a striking divergence in economic momentum between the two regions, with European economic data exceeding forecasts at the highest rate since February 2023, while recent US retail sales and employment figures have frequently disappointed.
While the recent rally has elevated European valuations, many investors view this re-rating as justified and potentially more compelling than simply purchasing undervalued assets. The Stoxx 600 currently trades at approximately 15 times forward earnings, with its discount to the S&P 500 narrowing to the smallest margin since February 2022. Justin Onuekwusi, Chief Investment Officer at St James's Place Wealth Management, observes that although the valuation discount remains attractive relative to the US, the market appears to be shifting focus from purely valuation metrics toward earnings and revenue growth, which he considers a positive development. His firm maintains an overweight position in European equities while holding a negative outlook on US stocks.
Rising bond yields are nevertheless testing market confidence, with French long-term borrowing costs reaching their highest level since 2008 this week and German long-term yields returning to 2011 levels. These pressures stem from ongoing oil price increases and uncertainty surrounding a lasting US-Iran ceasefire, fueling inflation concerns. The Stoxx 600 has failed to extend its gains since August, trailing the S&P 500's 2.7% advance this month after outperforming for two consecutive months. The Bank of America survey indicates that over half of participants expect the European Central Bank to raise interest rates within the next year, though historical patterns suggest this need not trigger a selloff as long as economic growth can support such monetary tightening. The Stoxx 600 shows greater sensitivity to economic growth than to interest rate fluctuations.
The substantial capital expenditures by major US technology companies on artificial intelligence have generated market anxiety, inadvertently creating a relative advantage for European equities. Unlike the US benchmark's heavy concentration in large AI spenders, European indices lean more heavily toward industries supporting AI development, including infrastructure and green energy, as well as companies positioned to benefit from AI application adoption. Alpesh Patel, Managing Partner at RootBridge Capital, notes that less fashionable cyclical sectors present interesting opportunities, offering profitability and resilience without AI exposure, providing an effective way to diversify against AI-related profit concentration risks. Madison Faller, Global Investment Strategist at J.P. Morgan Private Bank, emphasizes that stock selection has become crucial following this year's substantial gains, favoring European financial and industrial sectors that stand to benefit from a more favorable economic environment, along with companies possessing irreplaceable physical assets that are less susceptible to AI disruption.
Positioning data suggests room for further European equity purchases, with a net 6% of fund managers overweight eurozone stocks, still slightly below the long-term average. Conversely, US equity allocations have reached their highest level since December 2024, standing approximately 1.5 standard deviations above average. As market participants grow weary of the US AI narrative and seek more attractive valuations and earnings certainty, European equities are re-entering the global investment spotlight through solid earnings recovery, resilient economic fundamentals, and comparatively lighter positioning. Europe is not merely an observer in the AI wave; it is extracting its own growth dividends through a different approach than Silicon Valley.
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