The pan-European STOXX 600 index is projected to climb about 2% to 670 points by year-end, according to a Reuters poll of strategists conducted from August 12 to 26. The median forecast would mark a record high for the benchmark, extending its annual gain to more than 13% following a nearly 17% rise in 2025.
European corporate earnings surged 24.1% year-over-year in the second quarter, the strongest quarterly growth since Q3 2022 and the fastest outside the post-pandemic recovery period in over a decade. Analysts cite resilient earnings as a counterpoint to cautious macroeconomic sentiment, with HSBC’s Duncan Toms noting that "earnings have been more resilient than the macro narrative suggests."
The STOXX 600 currently trades at 14.6 times forward 12-month earnings, a 26% discount to U.S. equities. This gap has narrowed significantly from the 41% discount recorded in November 2024, reflecting improved relative valuations. Citi’s David Groman highlighted the index’s recent performance, stating that "European equities have been a key beneficiary of the broadening trade in past months, supported by improving economic surprises and earnings revisions."
Money markets anticipate the European Central Bank will lift its deposit rate to 2.5% next month, with a greater than 25% probability of rates reaching 3.0% by mid-2027. Morningstar’s Michael Field cautioned that "inflation is still a concern, and interest rates are likely to rise further," while acknowledging pockets of value in sectors such as healthcare, consumer discretionary, and consumer staples.
Geopolitical risks and potential headwinds from tighter financial conditions or a stronger euro prompted Cassa Lombarda’s Marco Vailati to advise caution. The outlook comes amid elevated energy prices, with the Dutch front-month gas contract at the TTF hub hitting multi-month highs amid supply disruptions linked to regional conflicts.
Analysts remain divided on the broader equity outlook, with Morningstar’s Field noting that "it’s hard to be bullish" despite identifying areas of value. The STOXX 600’s forward valuation and earnings resilience suggest a cautiously optimistic stance, though risks from macroeconomic tightening and geopolitical tensions persist.
