European equities have extended their recent rally, with the Euro Stoxx 50 up 8% over the past three months, outpacing the S&P 500’s 5% gain in the same period. Analysts at Citi argue that supportive conditions could drive further gains, maintaining a Neutral stance on the region while setting a target of roughly 8% upside to mid-2027.
Citi economists estimate that fiscal policy will add about 30 basis points to Eurozone GDP growth in 2026, reversing a net drag in 2025. Germany’s fiscal deficit is projected to widen from approximately 2.7% of GDP in 2025 to around 4.0% this year, reflecting increased government spending. The EU’s proposed seven-year budget, valued at $2 trillion, is nearing finalization, signaling a commitment to sustained fiscal support.
The rally has been broad-based, with cyclical sectors such as Financials, Health Care, IT, and Industrials outperforming defensives within the MSCI Europe index. Beata Manthey, a strategist at Citi, notes that European economic surprise data has improved sharply in recent months after consistently underperforming following the escalation of the U.S.–Iran conflict. She highlights that revisions have been unusually broad, with most European sub-sectors seeing net earnings-per-share upgrades.
Europe’s relatively lower exposure to technology and artificial intelligence has also been framed as a potential advantage. Strategists suggest that the region may serve as an AI diversifier in global portfolios, tending to outperform when AI sentiment wavers. This dynamic could reinforce Europe’s role as a relative safe haven in volatile market conditions.
Stocks meeting Citi’s screening criteria—positive EPS momentum, attractive valuations, negative net crowding scores, and Buy or Neutral ratings—include Adyen, LVMH, Novo Nordisk, Diageo, and the London Stock Exchange Group. Historical ProPicks AI data also flagged Siemens Energy and Sandisk for significant pre-crowd gains of 231.5% and 189%, respectively.
