European equities are poised for further gains as fiscal stimulus and softer energy prices offset lingering geopolitical risks, according to Citi. The Euro Stoxx 50 has risen 8% over the past three months, outpacing the S&P 500’s 5% gain in the same period.
Citi strategists project roughly 8% upside for European equities through mid-2027, with fiscal policy expected to add about 30 basis points to Eurozone GDP growth in 2026. This follows a net drag on growth in 2025. Germany’s fiscal deficit is forecast to widen from 2.7% of GDP in 2025 to around 4.0% in 2026, reflecting increased government spending.
The European Union’s proposed seven-year budget, valued at $2 trillion, is nearing finalization, providing further support to the region’s economic outlook. Citi economists note that economic surprise data for Europe has improved sharply in recent months, reversing a trend of consistent underperformance following the U.S.-Iran conflict.
Despite the positive momentum, Citi maintains a neutral stance on the region. Analysts highlight that Europe’s limited exposure to the volatile AI trade could position it as a diversifier in global portfolios, particularly when sentiment around artificial intelligence wavers. The Euro Stoxx 50’s performance has benefited from broad-based earnings revisions, with most European sub-sectors seeing net upward adjustments to earnings per share.
Geopolitical risks remain a concern, with higher oil prices and interest rates posing potential headwinds. However, investor positioning has become more constructive, reflecting cautious optimism. Key stocks cited by Citi include Adyen, LVMH, Novo Nordisk, Diageo, and the London Stock Exchange Group, underscoring the breadth of the rally across sectors.
