French equities are underperforming other European markets by the widest margin since 2010. Investors are demanding a steep discount on French stocks to reflect the strain on the country's public finances and the risks posed by an upcoming presidential election.
Since the start of August, France's benchmark CAC 40 index has fallen steadily. The decline followed a sharp sell-off in French government bonds driven by worries about the sustainability of the country's debt, and that selling pressure has spread to other assets. So far in 2026, French stocks are down 3%, while the pan-European Stoxx 600 index has gained more than 7%. French equities were already under pressure due to their high weighting in struggling sectors such as luxury goods and automaking, and this round of selling has hit them especially hard.
"French stocks used to trade at a premium to other European markets, but the situation has clearly reversed," 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 weakening in French stocks, and the underperformance has intensified further since this summer. Investors believe French equities will struggle to recover their losses in the near term.
"Over the coming weeks, it is hard to see money actively buying French stocks," said Emmanuel Cau, head of European equity strategy at Barclays. He said budget negotiations in France are still ongoing, and with the presidential election set for April next year, the market is unlikely to gain clear expectations or a stable environment.
The sell-off, led by bank shares, has added further pressure to an already fragile market. In the first half of the year, French banks had risen along with the broader European banking sector. But the bond market rout ended that rally, and in recent weeks bond-market panic has spread across the entire eurozone. French banks hold large amounts of their own government's debt, and investors worry that a bond-market slump could drag down economic growth and in turn worsen the quality of banks' credit assets.
Since the start of August, shares of Societe Generale have fallen more than 20%, while BNP Paribas has dropped 19%. Over the same period, the euro has fallen to its lowest level against the pound and the dollar since mid-2025. "Buying French bank stocks requires a lot of courage. I don't think there will be many people in the market brave enough to catch the bottom," said Thozet of Carmignac.
The luxury sector is one of the largest weightings in the French benchmark and has remained sluggish all year. Demand for high-end goods has been declining for years, weighing on corporate earnings. Luxury giants LVMH, Hermes and Kering have each fallen more than 25% this year. Meanwhile, major French automakers such as Stellantis and Renault are under pressure on two fronts: additional trade tariffs imposed by Trump and fierce competition from Chinese automakers. In 2026, Stellantis shares are down nearly 60%, while Renault has fallen 25%.
French large-cap stocks are concentrated in industrials, banking and luxury goods, with relatively low exposure to the energy and technology sectors that have performed best globally this year. A few overweight sectors have bucked the trend: chipmaker STMicroelectronics is up 94% this year, and TotalEnergies has gained 44%.
The weakness in French equities stands in sharp 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 gaining more than 11%.
A deep sell-off in French government bonds has pushed the 10-year yield close to 5%, the highest in nearly 25 years. Markets are worried about the sustainability of France's debt, with public debt at almost 120% of GDP. Some large investors warn that the fiscal outlook could deteriorate further: politicians are arguing over a 54 billion euro fiscal savings plan in the government's draft budget while also courting voters ahead of the April presidential election.
Vincent Chaigneau, head of research at Generali Asset Management, commenting on the weakness in French equities and credit markets, said: "The potential impact of rising yields on the economy is a concern. Market confidence is low and will be hard to restore before the election."
Some argue that stocks will attract buyers after the sharp decline. Marina Zavolock, head of European equity strategy at Morgan Stanley, said the current drop in French stocks is sentiment-driven following the weakness in the bond market. "What matters next is whether earnings fundamentals deteriorate, but so far we see limited signals of that. Usually this is a time to buy the dip," Zavolock said.
But others warn that stocks could fall again if economic difficulties deepen. Goldman Sachs analysts said in a research note this month that a France-specific risk premium can explain about half of French equities' underperformance relative to other European markets in recent years. The note said: "Now almost every French sector is valued below its European peers, and at a larger discount to US peers." It warned that if political uncertainty persists, the domestic economy weakens, or pressure on the euro intensifies, stocks with large exposure to the domestic market will suffer further shocks.
Comments