Europe's benchmark STOXX 600 index reached an all-time high of 653.19 on Friday before settling near 652.66, putting it on course for its largest weekly gain in over a month. The milestone comes as several major Wall Street brokerages have revised their European equity targets upward in recent weeks, signaling a more constructive outlook for the region.
Bank of America raised its year-end STOXX 600 target to 630 from 590, citing an improving euro zone growth outlook as the energy shock from the Iran conflict fades and German fiscal stimulus begins to feed into economic activity. The bank's economists expect euro area domestic demand growth to reaccelerate through year-end, supported by a less hawkish European Central Bank and easing inflation pressures.
Recent data supports this view. Euro zone inflation rose less than expected in June, while S&P Global's survey showed overall business activity moved out of contraction territory for the first time since March. BofA described the environment as a "mini-Goldilocks moment" — economic activity rebounding while price pressures moderate.
However, the bank stopped short of a full endorsement, retaining its underweight rating on Europe relative to global equities. "We remain negative on European equities despite a more constructive euro area growth outlook: the European market remains priced for perfection," said BofA strategist Sebastian Raedler. The firm expects the index to dip to 595 by early in the fourth quarter, weighed down by rich valuations, a potential slowdown in AI-driven market momentum, and rising credit risks, before recovering toward its year-end target.
JP Morgan and Barclays have also made similar upward revisions in recent weeks, with Barclays dropping its previously bearish stance on the region. For context, the Dow recently hit a record 52,865 as weak jobs data dimmed Fed rate hike prospects, highlighting a broader global equity rally.
UBS analysts argued that Europe's AI-driven rally has room to extend beyond technology into industrial and luxury stocks. Re-shoring of industrial capability, government spending programs, and brightening economic conditions should help a wider pool of companies participate. European industrials currently trade at a discount to their US peers, but analysts expect momentum from electrification and AI data-center buildout to help close that gap. Stabilizing demand for luxury goods should also support a rebound, with German fiscal spending providing an additional tailwind for domestic stocks.
BofA separately upgraded the United Kingdom to overweight from marketweight, while maintaining an overweight stance on Germany, saying both markets appear overly pessimistically priced relative to their underlying economic outlooks. "While we remain neutral on European equities overall, the case for selective exposure remains strong," UBS said.
The near-term earnings picture adds complexity. Companies in the STOXX 600 are forecast to post average earnings growth of 14.5% in the second quarter, according to LSEG IBES data. However, excluding the energy sector, profit growth falls to 5.5%, revealing how heavily the region's earnings recovery depends on a jump in oil and gas company profits. That concentration makes the broader market more vulnerable to any reversal in energy prices than the top-line number suggests.
Overall, analyst consensus points to a European equity market at an inflection point — improving fundamentals, selective opportunities in industrials, luxury, the UK, and Germany, but valuations that leave little margin for error and an earnings base that is narrower than it appears. For investors tracking AI-driven plays, the recent Tesla stock drop despite record deliveries underscores the volatility in AI-focused names, while SK Hynix's $29.4B US listing highlights the reshaping of the AI memory chip landscape.
This article is for informational purposes only and does not constitute financial advice.
