Why Europe has been winning lately
European shares have been on a tear. Since the start of October, the Stoxx 600 climbed 4.6% to an all time high while AI jitters knocked other benchmarks, steering money toward Europe's steadier profile.
Several supports helped. Quarterly results were strong, and profit trajectories converged with the US for the first time going back to early 2023. Crude has dropped 19% this month as optimism builds that conflicts involving Ukraine and Iran could move toward peace. Optimism about easing tensions in the Middle East and Ukraine added a lift, and a potential pivot in AI from chip suppliers to companies adopting AI could become another spark.
Positioning has also turned friendlier. Citigroup data show a clear pickup in long buying in Europe at the start of November, whereas the US saw some softening.
Why some investors are getting nervous
Valuation is front and center. The Stoxx 600 changes hands at 14 times expected earnings, about a 20% markdown to the S&P 500 versus a typical gap of 30% over the last five years. The tighter spread owes a lot to cheaper US multiples this year as investors cooled on AI amid worries about overspending, the chance of a Democratic sweep in Congress, and the ouster of Nvidia Corp.'s CEO Jensen Huang.
Macro and politics are another drag. France sits at the core of sovereign risk, with a fight over how to rein in a surging budget deficit and the approach of next year's presidential vote pushing the French 10 year yield premium over Germany's above 150 basis points. Cost of living protests have broken out in France, Italy and Spain, and Spain faces a snap election on Nov. 29.
The tape looks hot too. Overbought readings are widespread, with almost no stocks flashing oversold, and seven sectors are screening as stretched, with seven sectors looking stretched - among them travel and leisure, utilities, and healthcare. Bank of America's Sebastian Raedler moved to underweight Europe and sees roughly 10% underperformance versus global peers by the end of the second quarter next year, citing a one off earnings pop, a fading oil dividend and the risk of wider French spreads.
What the pros are calling now
Not everyone is on the same page, but the tone has cooled. Pictet Asset Management's chief strategist, Luca Paolini, said, "We are very cautious on European stocks in general after the rally," pointing to a shrinking valuation gap with the US, weak growth and waning earnings momentum. "For the time being we stay away from most European assets, we see more upside elsewhere."
At Societe Generale SA, a team that includes Roland Kaloyan wrote that the move looks extended given macro and political risks, fundamentals and technicals, adding that with the Stoxx 600 near their upside risk target there is little room left by year end. Citi's team led by Beata Manthey turned overweight Europe earlier this month, and UBS's Gerry Fowler and Sutanya Chedda expect the Stoxx 600 to post double-digit gains by the end of 2027.
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Goldman Sachs is underweight Europe for 2027 while favoring the US and Japan. A group featuring Peter Oppenheimer and Sharon Bell expects the Stoxx 600 to rise 5% over the next 12 months versus 15% for the S&P 500, arguing Europe has not cheapened as much as other regions and faces higher risks from government debt "issues" and "a heavy political calendar."
Earnings, banks and the investor takeaway
The profit picture may cool from here. Bloomberg Intelligence sees earnings per share for the Stoxx Europe 600 growing 19% in 2026, but the growth rate is expected to drop by more than half next year. Europe's recent edge has also leaned on US headaches, from an AI shakeout to sticky inflation and firm hiring stoking talk of more Fed hikes, a challenge for debt heavy firms including tech.
Banks still have a breeze at their backs. Higher rates help lenders, which account for 16% of the Stoxx 600, the index's biggest sector weight.
At State Street Global Markets, head of equity research Marija Veitmane said, "I am in general quite skeptical about the European outlook," "The macro backdrop is still challenging and likely to remain so next year. So despite valuation and positioning being low, it is hard to imagine strong performance without earnings growth."
The bottom line: a lot has to keep breaking Europe's way for the rally to extend. If earnings slow, oil's slide stalls or US sentiment rebounds, leadership could flip back. Positioning your portfolio comes down to how you handicap those moving parts.
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