Investors are demanding a steep discount on French stocks relative to comparable shares in other European markets to reflect the country's severe public finances and the risks posed by an upcoming presidential election.
French equities are trailing other European markets by the widest margin since 2010, as investors seek a significant valuation discount to account for the nation's fiscal difficulties and the uncertainty surrounding next year's presidential vote.
Since early August, France's benchmark CAC 40 index has fallen sharply, after a fierce sell-off in French government bonds driven by concerns over debt sustainability spilled over into other assets.
So far this year, French stocks have declined 3%, while the pan-European Stoxx Europe 600 index has gained more than 7%. The sell-off has hit a market already weighed down by a heavy concentration in struggling sectors such as luxury goods and carmaking particularly hard.
"In the past, French stocks used to trade at a premium to the rest of Europe, but that has clearly changed," said Kevin Thozet, a member of the investment committee at French asset manager Carmignac. He noted that the snap parliamentary election in 2024 marked the beginning of a "broad-based" relative underperformance in French equities, which has intensified since this summer.
Investors say French stocks are unlikely to recover their losses quickly in the near term. "It is going to be very difficult to get investors to buy French stocks in the coming weeks," said Emmanuel Cau, head of European equity strategy at Barclays. He pointed to ongoing budget negotiations in France and the presidential election next April, which make it "hard to get a clear view or stability."
A recent sell-off led by bank shares has added to the pressure already facing French equities. In the first half of this year, French bank stocks benefited from a broad rally in European banking. That momentum ended, however, as the bond market suffered a sell-off. In recent weeks, the bond slump has spread to the broader eurozone market. French banks hold large amounts of government debt, and investors worry that a bond market rout could hit economic growth and worsen the quality of bank loan assets.
Since early August, shares in Société Générale have fallen more than 20%, while BNP Paribas has dropped 19%. Meanwhile, the euro has fallen to its lowest level since mid-2025 against both the pound and the dollar.
"You need a lot of courage to buy French bank stocks. I don't think there will be many brave souls in the market," said Carmignac's Thozet.
Luxury goods is one of the most heavily weighted sectors in the French stock market. This year, the sector has fallen sharply as a years-long slump in demand for high-end goods has weighed on corporate earnings. Shares in luxury giants LVMH, Hermès and Kering have each fallen more than 25% so far this year.
Meanwhile, major French carmakers such as Stellantis and Renault are facing a double squeeze: pressure from the United States on one side and fierce competition from foreign rivals on the other. So far this year, Stellantis shares have tumbled nearly 60%, while Renault has fallen 25%.
Because industrials, banks and luxury goods carry heavy weight in France's large-cap market, French equities have relatively little exposure to energy and technology stocks — the two best-performing sectors globally this year. Gains in the French market are highly concentrated in these underweight sectors. So far this year, chipmaker STMicroelectronics has risen 94%, while TotalEnergies has gained 44%.
The weak performance of French equities stands in stark contrast to the resilience of other European markets. Stock markets in the UK, Germany, Italy and Spain have all risen this year, with Italy and Spain each up more than 11%.
A massive sell-off in French government bonds has pushed the 10-year yield to nearly 5%, the highest level in almost 25 years. This has further intensified concerns about the sustainability of France's debt. Government debt now stands at close to 120% of gross domestic product.
Some large investors warn that France's fiscal outlook could deteriorate further. French politicians are debating a €54 billion fiscal austerity plan in the government's draft budget, while parties seek to appeal to voters ahead of the presidential election next April.
"As yields rise, the market is worried about the impact this could have on the economy," said Vincent Chaigneau, head of research at Generali Asset Management, referring to the weak performance of French equities and credit markets. "Market confidence is already low and is likely to remain subdued until the presidential election," he added.
Some, however, believe that heavily sold-off stocks will eventually attract buyers. Marina Zavolock, head of European equity strategy at Morgan Stanley, said the sell-off in French stocks following the bond market weakness looks more like a "sentiment-driven trade." "Time will tell whether that sentiment actually shows up in corporate earnings fundamentals, but so far the signs we see are still limited," Zavolock said. "Usually, this is a good time to buy the dip," she added.
But others warn that another leg down in stocks is possible if France's economic troubles deepen. In a report published this month, Goldman Sachs analysts said about half of French equities' underperformance relative to other European markets in recent years can be attributed to a "France-specific risk premium." "Today, almost all French sectors trade at a discount to their European peers, with an even larger discount to their US counterparts," the analysts said. They warned that stocks with exposure mainly to the French domestic market could suffer further if "political uncertainty persists, domestic economic growth weakens, or pressure on the euro intensifies."
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