European wealth managers are increasingly divesting from European equities, even as the market has seen a strong rally. This cautious approach is driven by concerns that current valuations are overly optimistic, reflecting a belief that the recent earnings improvements have already been priced in. Madison Faller from JPMorgan Private Bank noted that while European equity earnings have improved over the past quarters, valuations have caught up, necessitating a more selective approach within Europe.
This sentiment contrasts with the overall performance of European stocks, which have been outperforming global peers, with the Euro Stoxx 50 even outpacing the S&P 500 since the beginning of 2025. Goldman Sachs strategists have called Europe "the secret outperformer," highlighting 14% year-over-year earnings per share growth in the first six months, with a consensus expecting nearly 18% for the full year. Despite this, some wealth managers remain wary.
Several factors contribute to the cautious outlook among wealth managers. Geopolitical risks, particularly the escalation of the Iran war, have pushed oil prices above $95 a barrel, amplifying concerns about persistent inflation and tighter monetary policy. Europe's reliance on energy imports makes its equities particularly vulnerable to higher oil prices. Additionally, the European Central Bank is expected to continue raising borrowing costs, with traders almost certain of a 2.5% hike next week and two more quarter-point increases by mid-2027.
While foreign investors have driven significant inflows into European equities, marking the best inflows in a decade (excluding 2021), retail investor participation remains stubbornly low compared to the US. In the US, equity allocations form nearly 50% of household wealth, whereas in Europe, it hovers around 20%. This disparity is partly due to government incentives and market structure issues, such as the fragmentation of European equity markets and the outlawing of payment for order flow, which made commission-free trading difficult.
Recent market movements reflect this mixed sentiment, with European stocks recovering slightly on September 3rd from one-month lows as bond yields retreated, yet the pan-European STOXX 600 still dropped 0.8% for the week ending September 4th. The luxury sector experienced significant losses, with LVMH falling 1.8%, Hermes and Kering dropping about 2% and 3% respectively. However, some individual stocks, such as Soitec, jumped 10.3% after raising its revenue growth outlook, and banking stocks like AIB and Bank of Ireland saw gains. This selective performance reinforces the idea that investors need to be more discerning in the current European market environment.
