Citi has maintained its constructive outlook for European stocks, suggesting there's still room for growth despite some clear economic hurdles.
The core of Citi's argument is that the rise in European stock prices will be driven by strong corporate earnings, not just by investors becoming more optimistic and willing to pay higher prices (a phenomenon known as 're-rating'). They project double-digit earnings per share (EPS) growth for 2026 and 2027, which they believe can support the market even if valuation multiples, like the P/E ratio, remain conservative.
However, this positive view comes with significant challenges. First is the energy shock. A spike in oil and gas prices earlier in the year has pushed inflation back up in the Eurozone. Second, in response to this inflation, the European Central Bank (ECB) is expected to raise interest rates again. Higher interest rates can make borrowing more expensive for companies and consumers, potentially slowing down the economy. These two factors—energy and rates—are the main headwinds Citi acknowledges.
So, why the optimism? There are a few key tailwinds. First, there's ongoing fiscal support. Programs like NextGenerationEU are still distributing funds to member countries, which helps stimulate economic activity. Second, global fund managers have recently reduced their holdings of European stocks, meaning they are 'lightly positioned'. If Europe's earnings story holds up, this capital could flow back into the market, pushing prices higher.
Finally, there's the AI factor. Europe is generally seen as lagging behind the U.S. in the AI race. While this might limit the kind of explosive growth seen in U.S. tech giants, it also means the European market is more balanced. Citi favors a diversified approach, holding sectors like Banks (which can benefit from higher rates), Basic Resources (leveraged to the commodity cycle), and defensive areas like Health Care and Personal Goods.
- STOXX Europe 600: A stock index representing 600 large, mid and small capitalization companies across 17 European countries. It's a key benchmark for the European stock market.
- P/E Ratio (Price-to-Earnings Ratio): A valuation metric that compares a company's stock price to its earnings per share. A higher P/E suggests investors expect higher future growth.
- ECB (European Central Bank): The central bank for the Eurozone, responsible for monetary policy and maintaining price stability, much like the Federal Reserve in the U.S.