After a stellar start to the year, European equities went into a consolidation phase during the summer. In our view, this was driven by two major impacts. Firstly, the ongoing euro strength weighed on consensus earnings expectations which was revised to -1% EPS growth for 2025 (vs. +8% in January). This didn’t impact all companies equally as the earnings of US-exposed stocks were been revised down 10–15%, while the earnings of domestic exposed stocks managed to grow (see Chart 4). Secondly, the market seems to have entered a “show me” phase in respect to increased spending.
Looking ahead to 2026, stronger European GDP growth should support earnings while FX headwinds will persist. We thus think that the current consensus expectation of ~12% earnings growth is too high which makes earnings downgrades likely. Since we don´t think Europe can outperform going forward, we downgrade Europe to Neutral. Within Europe, however, we retain our current preferences and continue to prefer exposure to the European autonomy theme, domestic exposure (especially SMIDs) and certain sectors like banks.