A growing chorus of Wall Street strategists is forecasting a banner year for European stocks, predicting they could achieve their most significant outperformance relative to their US counterparts in at least two decades.
This optimistic outlook is largely fueled by an improving economic landscape in Europe and a recalibration of corporate earnings expectations.
The Stoxx Europe 600 Index is anticipated to conclude the year around the 554-point mark, according to the average forecast from a Bloomberg poll of 20 strategists.
This projection suggests a potential gain of approximately 1% from its closing level on Friday.
Among the most bullish are JPMorgan Chase & Co., which has set one of the highest targets in the survey at 580 points, and Citigroup Inc., which predicts a more substantial 4% rally to 570 points.
This optimism is partly driven by analysts dialing back their earlier pessimism surrounding European corporate earnings.
In a striking contrast, both banking giants expect the US equity benchmark, the S&P 500, to decline through the remainder of the year.
The disparity in these forecasts is notable: JPMorgan’s targets for European and US markets suggest the Stoxx 600 could outperform the S&P 500 Index by a remarkable 25 percentage points in 2025 – a margin that would be the largest on record.
Citigroup’s projections, meanwhile, would mark the best relative performance for European stocks since 2005.
“If we have already moved past peak earnings uncertainty, this could set the stage for additional upside and potential multiple re-rating, especially among more beaten-up cyclical sectors,” commented Citigroup strategist Beata Manthey regarding European stocks, as quoted by Bloomberg.
From underdogs to frontrunners
This bullish outlook represents a significant turnaround from the sentiment prevailing at the beginning of the year, when strategists widely expected European stocks to lag considerably behind the US market.
However, the European benchmark has since rallied, propelled by historic fiscal reforms in Germany and surprisingly resilient corporate earnings.
These factors have attracted investors seeking alternatives to US assets, which have been caught in the crosscurrents of ongoing trade wars.
Evidence of this shifting sentiment was clear in a Bank of America Corp. survey published a week ago, which found that a net 35% of global fund managers are now overweight European stocks.
Conversely, net exposure to US stocks has reportedly dwindled to its smallest level in two years.
Further bolstering the case for Europe, MSCI Europe constituents posted a 5.3% increase in first-quarter earnings, significantly outperforming the 1.5% decline anticipated by analysts, according to data compiled by Bloomberg Intelligence.
Additionally, a Citigroup index indicates that fewer analysts have downgraded European earnings estimates in recent weeks.
In the US, the picture is far less optimistic.
A separate Bloomberg poll found that forecasters expect the S&P 500 to end the year at an average of 6,001 points, roughly unchanged from its recent closing levels.
Valuation considerations and lingering cautions
To be sure, this year’s 8.3% rally in the Stoxx 600 has brought valuations into sharper focus.
The benchmark now trades at approximately 14.6 times earnings, a figure higher than its 20-year median of 13.5, as per Bloomberg data.
However, this is still considerably lower than the S&P 500’s price-to-earnings ratio, which stands at nearly 22.
Goldman Sachs Group Inc. strategist Sharon Bell expressed her expectation that investors will continue to reallocate capital to the European region, citing its lower relative valuations and the high concentration risk in the US market.
“We also note that inflation should moderate further in Europe this year and there is a close relationship between lower inflation and higher average valuations,” she wrote in a recent note.
Despite the overall optimism, not all strategists are uniformly bullish.
Bloomberg’s poll revealed that only six firms—Bank of America, Deka Bank, ING, Panmure Liberum, Societe Generale SA, and TFS Derivatives—expect the Stoxx 600 to decline by more than 2% from Friday’s close.
Societe Generale strategist Roland Kaloyan indicated he needs to see stronger earnings trends and a further reduction in tariff-related risks before betting on a significant rally in the Stoxx 600.
His year-end target of 530 implies a potential 3.5% drop.
“The uncertainty surrounding tariffs further complicates the outlook, as many firms are reluctant to provide clear guidance, indicating that the full impact of these tariffs may not yet be captured in earnings forecasts,” Kaloyan stated.
Echoing a note of caution, UBS Group AG strategist Gerry Fowler acknowledged that valuations have increased as anticipated amid forecasts of stronger economic growth over the next two years.
However, he added, “For further gains, we must get through a period of regime uncertainty that will probably keep EPS growth at zero or modestly lower this year.”
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