Investors in the United States and abroad are watching a new Reuters poll that forecasts the pan‑European STOXX 600 index to end 2026 at roughly 670 points, about a 2% gain from current levels. While the rise is modest, it would still mark a record high for the benchmark and push the year‑to‑date gain above 13% after a 17% jump in 2025.
Strong earnings underpin the outlook
European companies delivered a robust 24.1% increase in second‑quarter earnings compared with a year earlier, according to LSEG I/B/E/S data. That represents the strongest quarterly earnings growth since the third quarter of 2022 and the fastest pace in more than a decade when the post‑pandemic recovery period is excluded.
“From a bottom‑up perspective, earnings have been more resilient than the macro narrative suggests,” said Duncan Toms, a multi‑asset strategist at HSBC. He expects European equities to continue outperforming in the months ahead, with earnings strength persisting into 2027.
Valuation and investor sentiment
Higher earnings have lifted share prices, narrowing the valuation gap with U.S. equities. The STOXX 600 now trades at about 14.6 times forward 12‑month earnings, a 26% discount to U.S. stocks, down from a 41% gap in November 2024. The narrowing spread reflects growing confidence in Europe’s economic outlook and a willingness among investors to pay richer multiples.
David Groman, a global equity strategist at Citi, noted that European equities have benefited from a “broadening trade” and improving economic surprises. Nevertheless, he remains neutral on European equities in a global allocation, citing lingering geopolitical risks and valuations that are no longer especially cheap.
Risks on the horizon
Despite the optimistic earnings backdrop, analysts warn of several headwinds. The European Central Bank is expected to raise its deposit rate to 2.5% next month, with a more than 25% chance of rates reaching 3.0% by mid‑2027 as policymakers aim to keep inflation in check.
Energy markets remain volatile due to the ongoing Iran‑war, which has disrupted supplies and pushed crude oil, natural gas, and refined product prices higher. The Dutch front‑month gas contract at the TTF hub recently hit its highest level since the March spike, raising concerns about higher household energy bills and manufacturing costs.
“Inflation is still a concern, and interest rates are likely to rise further,” said Michael Field, chief equity strategist at Morningstar. He sees value in sectors such as healthcare, consumer discretionary, and consumer staples, but cautions that a broadly bullish stance would be premature.
Currency considerations
The euro has strengthened amid worries that recent U.S. Treasury actions to curb long‑term bond yields could weaken the dollar. A stronger euro can be a headwind for European exporters that earn a large share of revenue outside the euro zone.
“Caution is warranted,” warned Marco Vailati, head of research and investments at Cassa Lombarda. He added that tighter financial conditions and a firmer euro could add further pressure to corporate earnings.
Overall, the poll suggests modest upside for European equities, tempered by monetary tightening, energy price volatility, and currency dynamics. Investors will be watching how the ECB’s policy path and geopolitical developments shape the market trajectory through the remainder of the year.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
