Recent surveys indicate a surge in optimism among major investment bank strategists regarding European equities, driven by a sustained recovery in corporate earnings growth and a widespread belief that the current market rally can withstand recent geopolitical tensions.
In the July survey, UBS Group AG emerged as the most bullish institution. After raising its benchmark index target, the bank now forecasts the Stoxx Europe 600 Index to rise by 8% by year-end. Bank of America Corp, Deutsche Bank AG, and Kepler Cheuvreux also revised their expectations upwards in tandem.
The average forecast from the 18 surveyed strategists predicts the index will close at 647 points by the end of 2026. While this level is less than 1% above the current point, bearish sentiment has significantly diminished, with only five respondents expecting a decline.
"At the moment, upside risks clearly outweigh downside risks," stated UBS strategist Gerry Fowler. He described his previous outlook as "overly cautious" and raised his target to 690 points.
Fowler pointed out that bottom-up evidence suggests negative catalysts are becoming "increasingly difficult to find" in key sectors such as healthcare, consumer staples, and luxury goods. Simultaneously, the list of themes with potential for positive revisions is lengthening, including AI-enabled companies, banks, and the industrial sector.
This month, European stock markets have reached new record highs. As concerns over the Iran conflict subsided following the April ceasefire agreement, investors have once again increased their allocations to Europe. The rally has so far withstood the test of renewed tensions, with oil prices remaining approximately $40 below their intraday highs from April.
From an optimistic perspective, a favorable global macroeconomic environment, substantial fiscal stimulus in Europe, and benefits from AI investment and implementation have collectively boosted market sentiment.
Strategists at Citigroup Inc. noted that their earnings revision indicator for Europe (excluding the UK) has surged to a five-year high, with 80% of sectors currently in a net upgrade zone.
"We remain positive on the outlook for European equities over the next 12 months and are encouraged by the recent positive shift in European earnings revisions," said Beata Manthey, Head of European Equity Strategy at Citigroup. "This round of upgrades is not only significant in magnitude and broad in sector coverage, but its timing is also noteworthy."
In this survey, the range of forecasts from various institutions has widened, yet only two strategists predicted a decline exceeding 5%. TFS Derivatives remains the most pessimistic, forecasting a 9% drop in the index to 585 points, followed closely by Société Générale SA, which expects a decline of approximately 6%.
"We expect the Stoxx 600 to end the year slightly lower, with a target of 600 points, primarily reflecting our more conservative earnings outlook," said Roland Kaloyan, Head of European Equity Strategy at Société Générale. "We believe the main risk is not a lack of earnings growth, but that the strength of the recovery may not match the level already priced in by the market."
He cautioned that market expectations are already elevated, with the strongest performance concentrated in AI and energy sectors. Kaloyan believes macroeconomic threats to the stock market cannot be ignored, citing fragile Middle East conditions, the US mid-term elections, tariff risks, and rising bond yields.
Senior Equity Strategist Laurent Douillet added, "The Stoxx 600's record highs mask a decline in institutional participation and trading volumes below pre-Middle East conflict levels, with institutional investors having turned net sellers. The rally is narrow, primarily reliant on financial and AI stocks, with half of the sectors underperforming the index. If the scope of corporate earnings downgrades widens and the energy tailwind fades, this rally is likely to lose momentum."
However, during the conflict period, European earnings expectations have continued to be revised upwards, with EPS growth forecasts at 14% for 2026 and 10% for 2027. The recently commenced Q2 earnings season has already produced numerous cases of "beating expectations and raising guidance," including from ASML Holding NV, Europe's largest company by market capitalization.
To date, over 45% of companies have reported results exceeding expectations, with only 27% missing. Statistically, earnings growth stands at 11.6% year-over-year, aligning with market consensus.
According to the latest Bank of America Global Fund Manager Survey released this week, European investors, after turning more cautious last month, are showing renewed signs of optimism. Global asset allocators have also begun to "re-focus" on the region.
A net 37% of European investors anticipate a "Goldilocks" scenario for the economy over the next three months—characterized by robust growth and falling inflation. This marks the first time since October 2024 that this view has become the dominant market perception.
Strategists at Bank of America, including Paulina Szymczak, reported that a net 54% of investors expect the region's stock market to rise in the coming months. In contrast, a net 4% of investors had expected a decline back in June.
"Valuations remain attractive, and earnings resilience is a key buffer against rising rates, providing fundamental support for style dispersion. However, the direction of oil prices remains an uncertainty," said Emmanuel Cau, a strategist at Barclays PLC.
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