European stock markets are firing on all cylinders, drawing money managers who believe this rally has more staying power than a short-term trade. The Stoxx Europe 600 Index gained every day last week in its longest winning streak since June, while regional benchmarks including the German DAX, French CAC 40 and Italian FTSE MIB have all hit all-time peaks.
Fundamentals shift in Europe's favour
For years the main attraction of European stocks was their deep discount to US equities. That valuation argument is now being reinforced by improving fundamentals. Europe Inc. has reported its best earnings growth in four years at 17%, alongside the strongest economic momentum since March 2023.
"There is definite excitement about Europe. The region's resilience has surprised the market and demand remains a lot firmer than had been expected."
That assessment comes from Helen Jewell, international chief investment officer for fundamental equities at BlackRock Inc. Her view is echoed by Mark Haefele, chief investment officer at UBS Global Wealth Management, who said: "With the balance of risks tilted to earnings beating expectations for this quarter, we think now is the time to review and potentially add to European equities."
Fund managers flip from underweight to overweight
The shift in sentiment is visible in positioning data. The latest Bank of America Corp survey shows a net 2% of fund managers are now overweight European equities, compared with 15% who were underweight in June. A Citigroup Inc analysis found Europe was the only major region to enjoy a meaningful improvement in risk appetite in the final week of July.
Breadth is also improving. About 75% of the Stoxx 600's constituents are trading above their 200-day moving average, near the top of the range for the past decade. The index has rallied 11% this year.
Geopolitical relief and AI adoption drive gains
Signs of cooling hostilities between Washington and Tehran have boosted sentiment, while oil prices have declined from their July peak, easing inflation worries. Beata Manthey, head of European equity strategy at Citigroup, said: "Investor sentiment was being hampered by geopolitics, but as that clears up, it will unlock more demand for regional stocks."
Semiconductor leaders surge
European semiconductor-related firms have been among the biggest drivers of the rally. ASML Holding NV and Infineon Technologies AG have both jumped more than 60% in 2026. Investors are now hunting for sectors poised to benefit from AI expenditure as well as companies that will enjoy stronger profit margins by adopting AI platforms.
A Bank of America basket of European AI adopters, comprising industrial group ABB Ltd, lender Standard Chartered Plc and power company E.On SE, has gained 14% this year, outperforming a 3% advance in US hyperscalers.
Banks and industrials provide diversification
Europe's economy-focused sectors including banks and industrial goods are proving a haven for investors looking for tech alternatives during wild swings in the AI trade. The Stoxx 600 Banks index is among the biggest gainers this year with a rally of 22%.
"Even if the AI momentum picks up again, investors are well aware of lingering volatility in the sector, which means tech is now a complementary rather than contradictory trade. Investors will continue to own tech but also add diversification through cyclical sectors, and that benefits European stocks."
Valuation gap narrows but scepticism lingers
The Stoxx 600 now trades at a valuation of 15 times forward earnings, the smallest discount to the S&P 500 in four years. Yet some market participants remain sceptical about Europe's longer-term growth potential compared with the US.
Ariane Hayate, a fund manager at Edmond de Rothschild Asset Management, warned that any Federal Reserve rate hikes could upset the trajectory for European stocks, though she added that "the direction of travel remains broadly positive."
For Daniel Murray, deputy chief investment officer at EFG Asset Management, investor scepticism had gone too far given the outlook for strong macro growth and solid earnings. "You're starting from a place where there's negative positioning, but the sentiment is improving. That's quite a nice combination," he said.