Clearer skies for European stocks

SEVERAL leading investment banks have raised their targets for European equities after easing tensions in the Middle East improved the outlook for growth and inflation, according to a Bloomberg survey.

Strategists at Goldman Sachs, Barclays and Societe Generale have all lifted their forecasts for the Stoxx Europe 600 Index, reflecting growing confidence that a US-Iran peace agreement and falling oil prices could support markets through the second half of the year.

Bloomberg’s latest survey of 16 strategists shows the benchmark European index is now expected to end 2026 at around 640 points, in line with recent record highs.

While that implies only modest gains from current levels, several market participants argue there is still significant upside beneath the surface as many sectors have yet to recover fully from the disruption caused by the conflict.

According to Bloomberg, the latest rally has been uneven, with technology and a handful

of large-cap names doing much of the heavy lifting while other areas of the market continue to trade below their pre-conflict levels.

Beata Manthey, head of European equity strategy at Citigroup, says headline index performance is masking a more fragmented recovery.

“Many sectors and individual stocks are still trading below their pre-conflict levels,” she says, adding that the market could now enter a “second phase of recovery” characterised by greater rotation and broader participation across sectors.

Manthey expects artificial intelligence (AI) to remain a key driver of equity performance, supported by strong earnings growth and continued corporate spending on AI-related technologies.

The improved mood among strategists comes as Brent crude prices have fallen sharply following the interim US-Iran agreement, reaching their lowest levels since early March.

Lower energy prices have reduced concerns about a prolonged inflation shock and eased pressure on central banks to tighten monetary policy further.

Barclays is among the most optimistic firms in Bloomberg’s survey.

Strategists led by Emmanuel Cau raise their target for the Stoxx Europe 600 by 50 points to 670, placing them alongside HSBC as the most bullish forecasters. Their projection implies almost 5% upside from current levels.

The Barclays team argues that while macroeconomic challenges remain, the risk of a sustained oil-price shock has diminished considerably.

“Reduced tail risk” from energy and interest-rate pressures should allow investors to broaden their exposure beyond the narrow group of stocks that have led markets higher so far, they say.

The bank continues to favour companies benefitting from AI-related investment and remains positive on European banks.

However, strategists also see scope for a catch-up rally among consumer-focused companies, particularly luxury goods makers.

The luxury sector has been one of the market’s weaker performers in recent months amid concerns about slowing demand, especially from China.

Barclays believes the sector could be vulnerable to a short squeeze if investors who have bet against luxury stocks are forced to unwind those positions quickly.

Goldman Sachs has also become slightly more constructive, although its outlook remains measured.

The bank’s team, led by Peter Oppenheimer, expects improvement “at the margin” rather than a dramatic acceleration in market performance.

In an environment still characterised by weak economic growth and persistent uncertainty, Goldman argues investors should focus on long-term structural themes capable of delivering reliable earnings growth.

Among its preferred sectors are technology, banking, aerospace and defence, as well as renewable energy companies.

The bank also favours what it describes as “Halo” stocks — businesses with heavy assets and low risk of technological obsolescence.

By contrast, Goldman remains cautious on the automotive and chemicals sectors, citing ongoing pressure on profit margins and increasing competition from Chinese producers.

Although sentiment has improved, Bloomberg notes that forecasts for European equities remain widely dispersed.

Societe Generale raises its target for the Stoxx Europe 600 to 600 from 580, but remains among the more cautious voices on the Street.

The bank expects the index to trade slightly below current levels over the next 12 months and warns that earnings expectations may prove too optimistic.

Strategists led by Alain Bokobza say risks remain, particularly the possibility of renewed trade tensions ahead of the US midterm elections.

The French bank nevertheless sees longer-term potential for European equities, forecasting that the benchmark index could reach 660 points in 2027.

It currently favours Germany’s DAX and Britain’s FTSE 100 over the broader European market.

Bloomberg Intelligence strategist Laurent Douillet also highlights a potential weakness in the bullish narrative.

While earnings estimates continue to move higher, he argues that expected profit growth is becoming increasingly concentrated in just a few areas of the market.

Energy companies such as Shell and BP have benefitted from previous gains in oil prices, while AI-linked firms including ASML continue to deliver strong growth.

Banks such as HSBC and BNP Paribas represent another important pillar supporting earnings forecasts.

The concern is that broader market participation has yet to fully materialise.

Investor sentiment remains mixed. According to Bank of America’s latest global fund manager survey, a net 4% of respondents expect European equities to decline over the coming months, the most bearish near-term reading since September 2024.

Yet, confidence improves significantly over a longer horizon.

A net 71% of investors expect European stocks to rise over the next year, up from 58% in the previous survey.

Meanwhile, a record 93% believe forward earnings will continue trending higher, helped by revenue growth and stronger cost discipline.

Those expectations are ambitious. Analysts are forecasting profit growth of roughly 14% in 2026, followed by a further 9% increase in 2027.

After first-quarter earnings growth of 7%, forecasts call for growth to accelerate sharply through the remainder of the year.

Not everyone is convinced those projections will be achieved.

UBS strategist Gerry Fowler warns that falling oil prices could mean the best days for energy earnings upgrades are already behind investors.

Likewise, expectations for lower interest rates may signal that bank earnings revisions have peaked.

Because energy and financial stocks have been the largest contributors to European earnings growth this year, any downgrades could leave the broader market struggling to maintain positive momentum, he says.