Europe’s stocks shed value‑trap label

UBS strategists led by Gerry Fowler say European equities are moving beyond the long-held image of a low-growth, low-return market. The team points to investment in artificial intelligence and data‑centre infrastructure, higher public spending and rising corporate quality as factors drawing new capital into the region.

The strategists highlight channels of exposure to the AI and data‑centre cycle that lie outside pure‑play software firms. They cite semiconductor equipment, electrification, automation and power‑grid upgrades as primary areas supporting demand. Companies named as beneficiaries include ASML, Schneider Electric, Siemens and Siemens Energy. Industrials such as Rolls‑Royce, Airbus, Safran and Prysmian are identified for their roles in aerospace, defence, electrification and cable networks.

Market performance and fund flows back the assessment. The STOXX Europe 600 has gained more than 7% year to date, while the S&P 500 has advanced by over 11% in the same period. Goldman Sachs has tracked the fastest inflows into European equities in five years during the first half of 2026. Non‑US equity allocations have returned, with roughly 55% of those flows directed to Europe, and exchange‑traded fund buying relative to market capitalisation is beginning to recover after lagging the United States.

European banks are central to UBS’s positive view on the region. The bank notes banks in Europe have risen to more than double their value over the past two years, compared with roughly 30% gains for US banks. UBS finds early signs of a structural re‑leveraging cycle tied to rising corporate capital expenditure, and says public spending is already appearing in purchasing managers’ indexes.

UBS also points to the global footprint of large European firms. On average about half of revenue for European companies comes from outside the region, rising to roughly 65% among the 20 largest stocks. That overseas revenue exposure supports growth even when local GDP is weak. The strategists add that some market leaders have increased pricing power in supply‑constrained industries, writing, “Increasingly, Europe’s champions are price‑setters.”

Goldman Sachs has raised its full‑year earnings‑per‑share growth forecast for the STOXX Europe 600 to 15% from 10%. Sharon Bell of Goldman Sachs Research noted first‑half EPS growth is running at the strongest pace in three years, despite a renewed energy supply shock.

UBS flags interest‑rate moves as a key risk. The bank finds a tight relationship between European equity valuations and a combination of the US 10‑year Treasury yield and European high‑yield credit spreads, and says higher yields can push down price‑to‑earnings multiples. The strategists add that stronger economic and earnings growth can offset some of that effect, writing, “A genuine growth acceleration deserves a compressing equity risk premium.”

Positioning indicators show limited crowding in Europe since March and US positioning near record highs, a setup UBS says could allow further reallocation into European stocks if earnings momentum continues.