Why are investors warming to EU equities? Discover five key reasons

Several equity markets across Europe have hit record highs in recent weeks [1] and a broad index of shares in the eurozone has outperformed its US equivalent so far this year [2]. This strong performance has been accompanied by a notable improvement in investor sentiment.

A recent Bank of America survey of global fund managers showed a marked increase in allocations to European equities, with a net 2% of respondents overweight the region, up sharply from a net 15% who were underweight in June [3].

In this month’s commentary, we look at some of the reasons why investors are taking a more positive view of European equities.

The economy is proving resilient

Given that the eurozone is heavily dependent on imported energy, the region’s economy has held up surprisingly well in the wake of the price shock resulting from the US-Iran war. Data in the region has come in stronger than expected, and revised data showed eurozone Gross Domestic Product (GDP) expanding at a respectable 0.4% quarter-on-quarter during the second quarter after recording no growth in the first [4].

This equates to an annualised pace of around 1.6%, slightly higher than the equivalent 1.5% rate recorded in the US during that period [5]. German fiscal stimulus, along with increased defence and infrastructure spending should be supportive of economic activity in the region going forward.

This said, there are clear risks on the growth front. The ongoing conflict in the Middle East could result in another jump in oil and gas prices at a time when natural gas inventories in the region are at historically low levels [6]. This would hurt businesses and consumers directly and could usher in more aggressive growth-sapping interest rate hikes from the European Central Bank (ECB).

However, as it stands, markets expect the ECB to raise interest rates by only 25-50 basis points by the end of the year [7], and improving business survey data bodes well for continued expansion [8].

Corporate profits are rebounding

An improving macroeconomic backdrop has helped drive a recovery in corporate profits. During the second quarter, profits for companies in the STOXX 600 (Europe’s main stock market index) are on course to rise around 22% year-on-year (y/y) [9], faster than consensus forecasts and the strongest pace of growth since 2022.

A large part of the rise in profits during Q2 was the result of higher oil prices due to the war in Iran, but even excluding the energy sector, earnings per share were up 13% y/y [10]. Profits growth has been strong across a range of sectors.

European banks were among the standout performers in Q2, benefiting from higher interest rates and increased trading activity amid heightened market volatility. Earnings for European financial companies rose 18% y/y, with rising profits enabling many banks to announce share buyback programmes.

Industrial companies also performed strongly, managing to increase profits by 10% despite higher input costs resulting from the conflict in the Middle East [11]. Looking ahead, analysts expect earnings growth in the eurozone to remain in double digits.

For 2026 as a whole, consensus forecasts point to a 21.8% y/y increase in profits, following a 4.4% decline in 2025. Earnings growth is then expected to moderate to a still healthy 12.7% in 2027, partly reflecting less favourable base effects in the energy sector [12].

Valuations remain relatively attractive

Most developed-world equity markets are trading on historically elevated valuations. However, compared with the US, valuations of eurozone equities are relatively attractive and less stretched compared to long-term averages.

According to data from JP Morgan, the MSCI EMU index trades on a forward price/earnings ratio (or P/E, which measures share prices relative to expected earnings over the next 12 months) of 15.3 versus its long-term median of 12.9. In contrast, the equivalent US index has a forward P/E ratio of 20.8 compared with a long-term average of 15.5 [13].

One would expect US equities to trade on a higher P/E ratio than their eurozone counterparts, given the US market’s greater weighting towards faster-growing, highly profitable technology companies, which typically command higher valuations. However, comparisons at the sector level also suggest that eurozone equities are less richly valued.

For example, eurozone industrial companies trade on a forward P/E ratio of around 21, compared with 27 for their US counterparts. A similar valuation gap is evident in the energy sector, where the respective forward P/E ratios are around 9 and 14 [14].

For investors seeking income, eurozone equities are also relatively attractive. The MSCI EMU index currently has a dividend yield of 2.7%, more than double the equivalent yield of 1.1% in the US [15].

The ‘anti-AI’ trade…..

The recent rally in European equities has also been aided by what might be described as an ‘anti-AI trade’. For several years, US equity market returns have been concentrated among a relatively small number of technology and AI-related companies [16].

However, more recently, concerns over the huge sums being invested in AI infrastructure, uncertainty over companies’ ability to monetise that investment, and growing competition from China have encouraged some investors to diversify away from the theme. Europe has been a natural beneficiary.

Technology accounts for a much smaller share of European equity indices (around 10% [17] vs 36% in the US [18]), which instead have greater exposure to areas such as financials, industrials and healthcare. As enthusiasm for some of the leading AI-related stocks has cooled, capital has rotated towards some previously unloved sectors, helping European markets reach record highs.

Investors have not abandoned the AI theme altogether. Global technology and semiconductor stocks have rallied strongly in recent weeks after falling sharply in July [19].

Rather, there appears to have been a desire among some investors to diversify away from an increasingly concentrated AI trade in the US, strengthening the relative appeal of European equities.

Europe is benefitting from AI too

Indeed, although Europe is not home to the US ‘hyperscalers’ leading the surge in AI infrastructure investment, it has several companies that are benefiting significantly from their spending.

Most obviously, the Dutch technology company ASML, which makes the highly advanced lithography machines used by semiconductor manufacturers to produce cutting-edge chips, has been a major beneficiary of the AI data-centre buildout. ASML is Europe’s largest company by market capitalisation [20] and, despite the threat from growing competition from Chinese rivals, its share price has risen by approximately 75% year-to-date [21].

However, other European companies in the AI infrastructure supply chain are also seeing large increases in demand. For example, Schneider Electric SE (a French manufacturer of the power-management, electrical distribution and cooling infrastructure needed to keep data centres running reliably and efficiently) has recently lifted its sales and profits guidance because of the AI capex boom [22].

The company’s share price is up around 30% so far this year [23].

The German industrial giant Siemens has also seen strong demand for its products and services used to build AI data centres and has raised earnings guidance [24]. The company is Europe’s third largest by market capitalisation [25], and its share price is up by around 20% so far this year [26].

Moreover, while the so-called ‘enablers’ of the AI revolution are currently enjoying strong share price gains, analysts looking to the next phase of the AI trade see considerable potential for European companies to use AI to boost productivity and profit growth.

Strategists from Citigroup believe AI adoption in Europe is still at an early stage, with industrials, healthcare, technology, communication services and financials among the sectors that could benefit as its use broadens. Citigroup’s European AI Adopters index (which measures the share price performance of companies outside the pure technology and semiconductor sectors that Citi believes are positioned to benefit from operational and productivity improvements through AI implementation) has risen markedly in recent months [27].

Observers do not naturally think about European companies as being beneficiaries of the AI revolution. However, Goldman Sachs notes that previous technological breakthroughs have often seen the early movers invest too heavily, with the biggest gains ultimately accruing to companies that exploit the resulting infrastructure rather than those that financed its development [28].

Europe may yet prove to be one of AI’s less obvious winners.

17 August 2026

[1] https://investinglive.com/news/european-shares-end-mixed-but-dax-and-ibex-close-at-record-highs/

[2] FE Analytics

[3] https://uk.finance.yahoo.com/news/european-stocks-rise-lower-yields-083932238.html

[4] https://tradingeconomics.com/euro-area/gdp-growth

[5] https://tradingeconomics.com/united-states/gdp-growth

[6] https://www.celsiusenergy.net/p/european-natural-gas-inventories.html#google_vignette

[7] https://rateprobability.com/ecb

[8] https://www.pmi.spglobal.com/Public/Home/PressRelease/6efbc02cd9b849e6aafcc6c3a9b703db

[9] https://www.ft.com/content/297a8bf7-ce8b-44fe-bc51-3e2ec2e47699?syn-25a6b1a6=1

[10] JP Morgan Equity Strategy Q2 Earnings Season Tracker