European equities are gaining broad-based momentum, drawing asset managers who increasingly view the current rally as underpinned by durable fundamentals rather than a fleeting tactical trade.

Across earnings reports, economic growth indicators, sentiment surveys, and fund flow data, market metrics point to a significant shift in European stocks. The Stoxx Europe 600 Index advanced every day last week, marking its longest winning streak since June.

"There is definite excitement about Europe," said Helen Jewell, international chief investment officer for fundamental equities at BlackRock Inc. "The region's resilience has surprised the market and demand remains a lot firmer than had been expected."

Europe's traditional appeal as a lower-valuation alternative to U.S. markets is now reinforced by improving fundamentals. European companies are reporting their strongest earnings growth in four years at 17%, while the region notched its best economic momentum since March 2023. The earnings acceleration is particularly notable given that European profit margins have historically lagged U.S. peers, in part because the Stoxx 600 is more heavily weighted toward financials, industrials, and consumer sectors rather than the high-margin technology platforms that dominate American indices.

"With the balance of risks tilted to earnings beating expectations for this quarter, we think now is the time to review and potentially add to European equities," said Mark Haefele, chief investment officer at UBS Global Wealth Management.

A Bank of America Corp. survey showed a net 2% of fund managers are now overweight European equities, a sharp reversal from the 15% who were underweight in June. Separately, a Citigroup Inc. analysis found that Europe was the only major region to register a meaningful improvement in risk appetite during the final week of July. The repositioning comes after years of global investors favoring U.S. equities, where concentrated bets on mega-cap technology firms drove prolonged outperformance against European benchmarks.

Record-Breaking Run

The Stoxx 600 has rallied 11% year to date, with regional benchmarks including the German DAX, French CAC 40, and Italian FTSE MIB all reaching all-time peaks. The gains are also broad in scope: approximately 75% of Stoxx 600 constituents are trading above their 200-day moving average, near the highest level of the past decade.

Easing geopolitical tensions have further supported sentiment. Signs of cooling hostilities between Washington and Tehran have boosted investor confidence, although concerns persist about a full reopening of the Strait of Hormuz. Oil prices have retreated from their July peak, alleviating inflation pressures and reducing the risk that energy costs derail consumer spending across the euro area.

"Investor sentiment was being hampered by geopolitics, but as that clears up, it will unlock more demand for regional stocks," said Beata Manthey, head of European equity strategy at Citigroup.

AI Appeal

Investor attitudes toward artificial intelligence are also shifting in Europe's favor. After initially rewarding large-scale AI infrastructure spending, investors are now seeking sectors positioned to benefit from that capital deployment, as well as companies likely to achieve stronger profit margins through AI adoption.

European semiconductor firms ASML Holding NV and Infineon Technologies AG have both surged more than 60% in 2026, ranking among the biggest contributors to the Stoxx 600's gains. A Bank of America basket of European AI adopters — including industrial group ABB Ltd., lender Standard Chartered Plc, and power company E.On SE — has gained 14% this year, outpacing the 3% advance in U.S. hyperscalers.

Meanwhile, Europe's economy-facing sectors, particularly banks and industrial goods, are attracting investors seeking alternatives to technology amid sharp swings in AI-related trades. The Stoxx 600 Banks index is among the top performers of the year with a 22% rally, buoyed by net interest margins that remain elevated even as the European Central Bank begins to lower borrowing costs.

"Even if the AI momentum picks up again, investors are well aware of lingering volatility in the sector, which means tech is now a complementary rather than contradictory trade," Manthey said. "Investors will continue to own tech but also add diversification through cyclical sectors, and that benefits European stocks."

Valuations and Outlook

The Stoxx 600 now trades at 15 times forward earnings, representing the smallest valuation discount to the S&P 500 in four years. Nevertheless, some market participants remain cautious about Europe's longer-term growth trajectory relative to the U.S., where productivity gains and demographics have historically supported faster corporate earnings expansion.

Ariane Hayate, a fund manager at Edmond de Rothschild Asset Management, cautioned that any Federal Reserve rate hikes could disrupt the path for European equities. However, she noted that "the direction of travel remains broadly positive."

Daniel Murray, deputy chief investment officer at EFG Asset Management, argued that investor skepticism toward European stocks had gone too far, given the outlook for robust macroeconomic growth and solid corporate earnings.

"You're starting from a place where there's negative positioning, but the sentiment is improving," Murray said. "That's quite a nice combination."

Source: Fortune