"Getting harder to find reasons to be bearish!" UBS leads the shift, major banks simultaneously raise expectations for European stocks

According to a report by Zhitong Finance APP, a recent survey shows that as European corporate earnings growth continues to recover and the market generally believes that the current rally can withstand recent geopolitical turmoil, optimism among major investment bank strategists towards European equities is on the rise.

In the July survey, UBS emerged as the most bullish institution; after raising its benchmark index target, it now forecasts the Stoxx 600 Index to climb 8% by year-end. Bank of America, Deutsche Bank, and Kepler-Cheuvreux have also raised their expectations in tandem.

The 18 strategists surveyed expect the index to end 2026 at an average of 647 points. Although this is less than 1% above current levels, bearish views have shrunk markedly, with only five respondents expecting the index to fall.

“Currently, the upside risks clearly outweigh the downside risks,” said UBS strategist Gerry Fowler. He remarked that his previous viewpoint was “overly cautious” and has now raised his target to 690 points.

Fowler pointed out that bottom-up evidence shows that negative catalysts are becoming “increasingly hard to find” in heavyweight sectors such as healthcare, consumer staples, and luxury goods. Meanwhile, the list of themes with positive revision potential is growing, highlighted by AI-empowered companies, banks, and industrials.

This month, European stocks once again hit historic highs. As market concerns over conflict with Iran eased after the April ceasefire, investors have again increased their allocation to Europe. The rally has so far withstood the test of renewed tensions; while oil prices have climbed, they remain about $40 below their April intraday highs.

From an optimistic perspective, a favorable global macroeconomic backdrop, large-scale fiscal stimulus in Europe, coupled with the benefits of AI investment and deployment, have collectively boosted market sentiment. Citigroup strategists report that their Europe (ex-UK) earnings revision indicator has surged to a five-year high, with 80% of sectors now in net upgrade territory.

“We remain bullish on the outlook for European equities over the next 12 months and are encouraged by the positive recent changes in European earnings revisions,” said Beata Manthey, Citigroup’s Head of European Equity Strategy. “This round of upgrades is not only substantial and broad-based across industries, but the timing is also noteworthy.”

The range of forecasts has widened in this survey, but only two strategists predict a drop of more than 5%. TFS remains the most bearish, expecting the index to fall 9% to 585 points, followed by Société Générale with a projected drop of about 6%.

“We expect the Stoxx 600 Index to dip slightly by year-end, targeting 600 points, mainly reflecting our more conservative earnings outlook,” said Roland Kaloyan, Head of European Equity Strategy at Société Générale. “We believe the main risk is not a lack of earnings growth, but rather a recovery that may not be as strong as the market has already priced in.”

He cautioned that market expectations are already high, with the strongest performance concentrated in AI and energy sectors. Kaloyan believes that macroeconomic threats to the stock market should not be ignored, pointing to the fragile Middle East situation, U.S. midterm elections, tariff risks, and rising bond yields.

Senior equity strategist Laurent Douillet stated: “The record highs for the Stoxx 600 mask declining institutional participation and trading volumes below pre-Middle East conflict levels, as institutional investors have turned net sellers. The rally is narrow, mostly relying on financial and AI equities, while half the sectors have underperformed the index. Should earnings downgrades broaden or the energy boost wane, the current rally could well lose momentum.”

Nevertheless, during the conflict period, earnings forecasts for Europe were still being revised upwards, with EPS growth projected at 14% in 2026 and 10% in 2027. The just-begun Q2 earnings season has already seen numerous cases of “beats and upgraded guidance”, including from ASML (ASML.US), Europe’s largest listed company by market value.

So far, over 45% of companies have posted better-than-expected results, with only 27% missing expectations. According to statistics, the year-on-year earnings growth rate is 11.6%, consistent with market consensus.

According to this week’s Bank of America fund manager survey, after a cautious turn last month, European investors have recently shown renewed bullishness, while global asset allocators have begun to “refocus” on the region.

A net 37% of European investors expect that over the next three months the economy will enter a “Goldilocks” scenario—i.e., solid growth with falling inflation—which is the first time since October 2024 that this view has become mainstream. Bank of America strategists, including Paulina Strzelinska, noted that a net 54% of investors now expect regional equities to rise in the coming months, whereas in June a net 4% had anticipated a market decline.

“Valuations remain attractive, and the resilience of earnings is a key buffer against rising interest rates, also providing fundamental support for broader style participation, though the oil price outlook remains an uncertainty,” said Barclays strategist Emmanuel Cau.