Citigroup strategists, including David Chew, noted a significant improvement in risk appetite in Europe's stock market in recent weeks, making it the only major region to experience such a trend. This improvement is attributed to fresh capital inflows and better-than-expected earnings. European benchmarks have shown improved positioning sentiment, contrasting with deteriorating conviction indicators in the US, where AI-related fears have led to sharp positioning divergences, pushing South Korea's benchmark into bearish territory.
Beata Manthey, Citi's Head of European Equities, highlighted that Europe is becoming an attractive investment region due to improving economic conditions and expansionary fiscal policy. She identified AI and European banks as key beneficiaries in the current environment. This sentiment is supported by robust earnings, with MSCI Europe profits surging 14% and over half of the index's constituents beating second-quarter estimates, marking the highest figures since early 2023.
Citi projects European equities could see an 8% upside through mid-2027, maintaining a neutral allocation stance despite the positive outlook. This optimism is driven by a strong macroeconomic and earnings backdrop, sustained government spending, and Europe's role as a hedge against AI-related market volatility. European economic data surprises have become notably positive, and the bank's earnings revision gauge for Europe has risen, indicating widespread upgrades across nearly every subsector. Fiscal policy is expected to contribute approximately 30 basis points to Eurozone GDP expansion in 2026, with Germany's budget deficit projected to grow from about 2.7% of GDP in 2025 to nearly 4.0% in the current year. The EU's proposed $2 trillion seven-year budget is also nearing approval.
Manthey previously stated in May 2026 that European stock markets could rise an additional 5% by year-end, driven by an "explosion of earnings." She emphasized that the parts of the market driving the index level are performing well, and saw no risks from the earnings front. Citi suggests that Europe's comparatively limited exposure to tech makes it advantageous during periods of unstable AI trade sentiment, positioning the region as a significant diversifier against AI concentration in global portfolios. Despite these positive indicators, geopolitical threats, particularly elevated oil prices and interest rates, remain a major concern.
