European equities have extended gains in recent months, with the Euro Stoxx 50 rising 8% over the past three months compared with a 5% gain in the S&P 500, as fiscal support and improving earnings outweigh macroeconomic risks. Citi strategists, led by Beata Manthey, estimate that fiscal policy will add roughly 30 basis points to Eurozone GDP growth in 2026, reversing a net drag in 2025.
The European Union’s proposed seven-year budget of $2 trillion is nearing finalization, providing additional tailwinds for the region’s fiscal stance. Germany’s fiscal deficit is projected to widen from about 2.7% of GDP in 2025 to approximately 4.0% this year, reflecting increased government spending. Citi’s economists note that the fiscal impulse is supporting economic activity despite broader geopolitical uncertainties.
European equities have outperformed global peers, with large-cap stocks leading the advance. Within the MSCI Europe index, cyclical sectors such as finance, health, technology, and industrials have outpaced defensives. Citi attributes the rally to three key factors: a resilient macroeconomic and earnings backdrop, sustained fiscal support, and Europe’s positioning as a potential hedge against volatility in artificial intelligence-related equities due to its lower relative technology exposure.
Economic surprise data for Europe has improved markedly in recent months, reversing a trend of underperformance that persisted since the start of the US-Iran conflict. Citi’s European Earnings Revision Index has risen, defying typical seasonal weakness ahead of earnings season. The revisions have been broadly based, with the majority of European subsectors registering positive net earnings-per-share upgrades.
Despite the positive momentum, risks remain. Geopolitical tensions continue to pose a threat, particularly through the potential for higher oil prices and interest rates. Citi maintains a neutral regional allocation for European equities globally but projects an 8% upside potential for the asset class through mid-2027.
Among individual stocks cited by Citi’s ProPicks AI, Siemens Energy has delivered a 231.5% return and Sandisk a 189% return, underscoring the volatility and opportunity within European equity markets.
