Strategists have entered September with their most optimistic outlook for European equities since 2018. A survey of 16 market analysts reveals a median year-end target of 670 points for the STOXX Europe 600 index, marking the most bullish median forecast in eight years. This optimism is underpinned by robust corporate earnings growth, which is helping markets absorb the dual pressures of elevated energy prices and rising bond yields.
The internal breakdown of this survey offers notable insights. Panmure Liberum holds the position of the most substantial bull, projecting a 10% upside for the benchmark index by year-end, translating to roughly 700 points based on the September 16 closing price. Deka Bank has also raised its target, with no institution having lowered its forecast. On the more cautious end, Societe Generale maintains its unchanged prediction of 600 points. It is worth noting that the survey's average sits at 654 points, below the median, indicating that lower-end outliers are pulling the average down and highlighting a significant divergence between the bulls and the bears.
Duncan Toms, a multi-asset strategist at HSBC, belongs to the steadfast camp, having held his 670-point target since January without wavering. "A fall in energy prices would be a welcome relief for European equities, but there are other potential positive catalysts," Toms stated, pointing to continuously improving macroeconomic data and its positive implications. "If this momentum persists, combined with another strong third-quarter earnings season, the region could perform well again by the end of the year."
Headwinds: Oil Prices, the Bond Market, and a Hawkish Central Bank Shift
Over the past month, European stocks have indeed felt considerable pressure. The unresolved conflict in Iran has pushed up oil and gas prices, causing the STOXX 600 to retreat 2.7% from its August peak. According to Dow Jones Market Data, the index hit a record closing high of 660.51 points on August 11, only to fall to a three-month low of 634.17 points by September 15, with the Strait of Hormuz remaining effectively closed and renewed escalation of conflict continuing to dampen sentiment.
The interest rate environment has also been a source of concern. Brent crude oil, after surpassing $108 a barrel intraday on September 15, fell for two consecutive days but still closed above $100 on September 17, keeping inflation worries alive. The European Central Bank shifted notably hawkish after a 25-basis-point rate hike on September 10, bringing the deposit rate to 2.50%. Swap markets are now pricing in three more rate increases by June of next year. According to FXStreet, the interest rate swap market has priced in approximately 88 basis points of additional tightening, with the peak of this tightening cycle expected in September 2027. Meanwhile, the Bank of England held rates steady at 3.75% for a sixth consecutive meeting on September 17, but market pricing for future hikes is already at its limit, with expectations for four rate increases by July of next year almost fully priced in.
In the bond market, the yield on Germany's 10-year bund rose to 3.512% on September 10, the day of the rate decision, before retreating to 3.474% on September 17. Roland Kaloyan, a strategist at Societe Generale, laid out a clear list of risks: "Other risks include the unwinding of crowded positions in AI-related trades, the US midterm elections, renewed tariff tensions, and low European gas inventories. These factors combined could drive the equity risk premium higher."
Across the Atlantic: Confidence Also Wavering
The sentiment gap between strategists in Europe and the US is widening. This week, both Wells Fargo and Yardeni Research have lowered their year-end targets for the S&P 500. Ed Yardeni of Yardeni Research cut his target from 8,400 to 7,900 on Tuesday, citing rising bond yields and Middle East tensions, while also raising the probability of a recession in the next three to six months from 20% to 30%. The team led by Ohsung Kwon at Wells Fargo reduced their target from 7,950 to 7,700, arguing that the earnings cycle is in its late stages with limited upside for the index. In contrast, Bank of America has slightly raised its target to 7,400, which remains the lowest on Wall Street. However, Citadel Securities' Scott Rubner expressed on Thursday that he is feeling "increasingly constructive" on stocks.
Fund flow signals present a more nuanced picture. According to Bank of America's latest fund manager survey, the net percentage of investors expecting European equities to rise in the coming months has fallen to 39%, down from a net 53% in August. However, the same respondents have raised their average expected return for the region over the next 12 months to 6.3%, with 43% of investors believing European and US stock performance will be roughly similar over the next year. The vast majority of investors still cite "earnings upgrades" as the most likely catalyst for further gains in European stocks—while bullish sentiment has cooled, the rationale for optimism remains unchanged.
The Foundation: Fastest Earnings Growth in Four Years
The true foundation of this optimism lies in the earnings picture. Citing LSEG I/B/E/S data as of September 3, Charles Schwab notes that STOXX 600 constituents saw second-quarter 2026 earnings grow 23.9% year-over-year, up from 11.8% in the first quarter, far surpassing the single-digit growth of the prior two years. The consensus expectation for full-year 2026 earnings growth has been revised up steadily from 9.4% at the start of the year to 16.2% by August 25. The data indicates that STOXX 600 companies' 2026 earnings are projected to jump by 15%, the highest in four years, with a further 9.7% increase expected in 2027. Citi's earnings revision index for the region has remained in positive territory for 20 consecutive weeks, marking the longest winning streak in five years.
The upside case has also received more aggressive endorsements. On September 15, strategists Gerry Fowler and Sutanya Chedda at UBS raised their end-2026 target for the index from 630 to 690 points and their 2027 target to 760 points, citing the continued diffusion of AI-related earnings upgrades, still-positive bank earnings revisions, and the fact that defensive sectors are no longer a drag. This could allow valuations to break above 16 times earnings. The duo emphasized this is not a "call to celebrate," but rather a "call to reduce caution."
The valuation gap is another key argument repeatedly used by bulls. According to MSCI data from September 9-10, European stocks trade at a forward 12-month price-to-earnings ratio of about 14.7 times with a free cash flow yield of 5.5%, compared to 19.6 times and 2.9% respectively for their US counterparts.
Macroeconomic and fiscal support is also improving. The eurozone's final August inflation reading was revised down to 3.2% year-over-year. The regional and global macroeconomic backdrop remains strong, with economic surprise indices in positive territory and manufacturing activity expanding. Fiscal stimulus, particularly in Germany, is starting to gain traction. UBS also noted in its report that credit and consumption resilience in Spain, Italy, and Portugal is noticeably better than in Germany, France, and the UK.
The market's immediate reaction serves as a footnote to this optimism: on September 17, the STOXX 600 closed up 0.86% to 642.60 points, its biggest single-day gain since July 2, according to Dow Jones Market Data. Mining stocks surged 2.1%, auto stocks rose 1.7%, and the UK's FTSE 100 index climbed 1.19%, its largest one-day gain in over two months. Individual stock movements were starkly divided—Spain's e-commerce firm Allegro soared 9.5% after raising its full-year guidance, German industrial services provider Bilfinger plunged 21.4% in its worst-ever single-day drop following a second downgrade to its 2026 outlook, and Austria's Raiffeisen Bank International fell 6% after Grizzly Research disclosed a short position.
"Our constructive view on European equities through mid-2027 remains unchanged, based on solid EPS growth, while acknowledging that the risks to the cyclical improvement in macro and earnings trends from geopolitics and interest rates are rising," summarized Beata Manthey, head of European equity strategy at Citi. This perhaps encapsulates the common ground between bulls and bears in the current European market: the divergence lies in the risks, but the consensus rests in the earnings.