J.P. Morgan sees another 5%-10% upside for European equities in the second half

Overview

This is a J.P. Morgan equity strategy report whose core view is that global equities still offer constructive opportunities in the second half, with Europe especially worth watching. The report points out that European equities have reached the year-end target set in last year's outlook, with the SXXP reaching 630 and delivering about a 13% gain, but against the backdrop of upward revisions to earnings growth, recovery in activity indicators such as PMI and IFO, lower oil prices, easing inflation pressure, and low investor exposure to European risk, the market may still rise another 5%-10% from current levels.

Core views

The report's core judgments include: first, global equities should not be driven only by AI and the Mag-7, and market leadership is likely to broaden in the second half; second, earnings growth in Europe and the Eurozone is accelerating, with EPS forecasts for 2026 and 2027 revised upward; third, as long as inflation expectations remain anchored, Brent declines, bond yields stay range-bound, and PMI rises, the Eurozone's roughly 15x P/E can at least be sustained and may move modestly higher; fourth, in terms of positioning, it continues to favor cyclicals, high beta, semiconductors, industrials, mining, banks, and consumer, while remaining cautious on defensives, energy, business services, software, media, and defense.

Analysis framework

The report uses a top-down equity strategy framework, combining regional targets, earnings growth, valuation multiples, macro indicators, commodity prices, interest rates, geopolitics, positioning, and sector relative performance to assess the upside potential for European equities in the second half, and supports its sector allocation recommendations with PMI sensitivity, EPS upgrades, market breadth, investor positioning, and the oil price path.

Methodology notes

• Macro and Equity StrategyTop-Down Regional Equity Allocation Framework

  Use macro momentum, earnings growth, valuation, and positioning together to judge regional equity upside.

  The report links further upside in European equities to PMI recovery, improved global growth, lower inflation pressure, range-bound bond yields, and investor underweight positioning in Europe.

• Earnings ForecastingEPS Growth Upgrade Framework

  Validate earnings improvement through index-level forecasts, sector analyst forecasts, and the direction of earnings revisions.

  The report raises the Eurozone 2026 EPS growth forecast from 13% to 18%, and the 2027 forecast from 10% to 12%, while noting that bottom-up forecasts covering about 85% of index constituents are around 17%.

• Valuation methodsP/E Multiple and Macro Stress Test

  Assess whether valuation multiples can be sustained by examining oil prices, inflation expectations, the central bank path, and PMI.

  The report believes that if Brent declines, CPI falls, central bank tightening comes in below market pricing, and PMI recovers, the Eurozone's current roughly 15x P/E can at least be maintained and may rise modestly.

• Sector AllocationPMI Sensitivity and Cyclical vs. Defensive Framework

  Use sector sensitivity to PMI and credit conditions to judge relative opportunities in cyclicals, banks, capital goods, mining, semiconductors, and defensives.

  The report believes capital goods, banks, mining, semiconductors, and consumer are more sensitive to improving PMI and should benefit from recovering macro momentum; defensive sectors are usually not favored in a PMI rebound environment.

• Positioning and Market StructureMarket Participation Broadening Framework

  View extremely low market breadth as a potential opportunity for leadership broadening in the second half, rather than simply a risk signal.

  The report notes that market leadership in 2026 has been very narrow, with the top ten U.S. stocks accounting for more than 40% of S&P 500 market cap, the Mag-7 for about 35%, and emerging markets also highly concentrated, but this may imply catch-up potential for non-AI and cyclical sectors.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Europe/Eurozone Equities

  Core bullish region

  Strengths

  Even after reaching the previous target, there is still 5%-10% upside, supported by upward earnings revisions, PMI recovery, lower oil prices, and low positioning.

  Weaknesses

  Previous relative performance was interrupted by the Iran conflict, and some countries and sectors are sensitive to energy and geopolitical risks.

  Comparison

  Compared with global gains already driven by a handful of tech stocks, Europe could become attractive again if market breadth broadens.

  Risks

  Renewed escalation in the Iran conflict, a rebound in oil prices, tighter-than-expected central bank policy, failed PMI recovery, or no improvement in Chinese activity.

• Global Equities

  Constructive overall

  Strengths

  Strong corporate earnings, high Hyperscaler capex, improving non-tech capex, and still-loose financing conditions.

  Weaknesses

  Market leadership is extremely narrow, with gains highly concentrated in a few large tech stocks.

  Comparison

  The report believes narrow leadership this time may be an opportunity for market broadening rather than simply a topping signal.

  Risks

  Failure of market breadth to broaden, spillover from an AI trade pullback, rising bond yields, or slowing macro growth.

• Mag-7/Tech/AI Chain

  Still favored but no longer the only main theme

  Strengths

  Q1 2026 earnings growth of nearly 60%, all seven companies beat EPS expectations, Mag-7 relative P/E is at a 10-year low, and AI demand and Hyperscaler capex remain strong.

  Weaknesses

  Crowded positioning, higher earnings hurdles, and concerns around equity supply and IPOs may bring volatility.

  Comparison

  The report believes recent weakness is more about technicals and positioning than deteriorating fundamentals; however, market opportunities in the second half will be broader and not limited to AI.

  Risks

  AI service monetization below expectations, doubts about capex sustainability, increased tech volatility, or broader market structure pressure.

• Cyclicals and High Beta

  Remain long

  Strengths

  Macro recovery, rising PMI, improving credit, and broadening market participation are favorable for cyclical sectors; cyclical sectors in both Europe and the U.S. have already outperformed defensives.

  Weaknesses

  More sensitive to economic activity, interest rates, and geopolitical sentiment.

  Comparison

  In a rising PMI environment, cyclicals have a relative advantage over defensives.

  Risks

  PMI rebound fails to materialize, credit growth slows, or oil prices/inflation pressure rise again.

• Semiconductors

  Positive allocation

  Strengths

  Strong earnings performance, support from AI and data center capex, and rising DRAM spot prices supporting a multi-year upcycle in capex.

  Weaknesses

  Already up significantly, with valuation and positioning sensitive to near-term volatility.

  Comparison

  Compared with other cyclical sectors, semiconductors are supported by both cyclical recovery and AI capex.

  Risks

  Falling memory prices, slowing AI capex, increased supply, or broader tech volatility.

• Industrials and Capital Goods

  Preferred

  Strengths

  Global corporate capex growth is driven by investment in data centers, utility networks, and power generation, while improving PMI also benefits capital goods.

  Weaknesses

  Highly dependent on project investment cycles, financing conditions, and macro confidence.

  Comparison

  Better positioned than defensive sectors to benefit from improved activity indicators.

  Risks

  Delayed capex plans, insufficient PMI recovery, or renewed rises in interest rates.

• Mining and Copper-Related Assets

  Bullish and view recent weakness as a buying opportunity

  Strengths

  European mining has recently lagged copper prices, which the report sees as leaving catch-up potential; copper fundamentals are supported by tight supply and structural demand from data centers.

  Weaknesses

  Highly sensitive to Chinese activity, global industrial demand, and commodity prices.

  Comparison

  Mining has underperformed relative to copper prices, leaving potential room to revert toward commodity fundamentals.

  Risks

  Continued weakness in Chinese demand, falling copper prices, or a weaker-than-expected global manufacturing recovery.

• Banks

  Positive allocation

  Strengths

  Supported by PMI, credit growth, expectations of regulatory reform, and M&A activity, and may continue to perform well even if rates stay stable.

  Weaknesses

  Sensitive to the macro cycle, credit quality, and regulatory changes.

  Comparison

  Compared with defensive sectors, banks benefit more directly from improving credit conditions and recovering economic momentum.

  Risks

  Slower loan growth, rising credit risk, less-than-expected regulatory easing, or unfavorable yield curve changes.

• Consumer Sector

  Positive on catch-up upside

  Strengths

  Multiple consumer subsectors are rebounding from low levels, and the report sees catch-up potential as almost all consumer assets still remain at depressed levels.

  Weaknesses

  It has long lagged other cyclical groups, and recovery in consumer confidence still needs to be validated.

  Comparison

  Compared with cyclical groups such as banks, industrials, tech, and commodities that have already risen significantly, consumer is a sector that has not yet fully participated.

  Risks

  Insufficient improvement in real income, oil prices or inflation once again weighing on purchasing power, or failure of consumer confidence to recover.

• Energy

  Cautious or mildly negative

  Strengths

  A conflict-driven rise in oil prices could support near-term earnings forecasts.

  Weaknesses

  If oil prices fall, energy stocks face further downside risk; the report believes there is no clear valuation cushion between energy stocks and Brent.

  Comparison

  Under a scenario of falling oil prices and improving PMI, energy is less attractive than other cyclical sectors.

  Risks

  An upside move in oil prices could change the view, but if Brent falls as forecast, the energy sector faces valuation and earnings pressure.

• Defensive Sectors

  Not favored

  Strengths

  Typically offer defensive characteristics when growth slows or risk aversion rises.

  Weaknesses

  Negatively correlated with PMI; if PMI rises in the second half, defensive sectors typically should not be favored.

  Comparison

  The report prefers PMI-sensitive sectors such as capital goods, banks, mining, semiconductors, and consumer.

  Risks

  If macro recovery fails or geopolitical risks escalate, defensive sectors may outperform again.

• Business Services, Software, Media, and Defense

  Cautious

  Strengths

  Some subindustries still have structural growth or policy support.

  Weaknesses

  The report is explicitly cautious on business services, software, and media, and says it has recommended reducing defense exposure since last September.

  Comparison

  Compared with semiconductors, industrials, mining, banks, and consumer, these sectors are not among the report's main preferred directions.

  Risks

  Insufficient valuation digestion, downward revisions to growth expectations, crowded thematic trades, or pullbacks after prior strength.

Key data

• Further upside potential in Europe5%-10%After updating its European target, the report expects about another 5%-10% upside from current levels.
• Previous SXXP target630The Stoxx 600 has reached the 630 target set in the November outlook last year, rising about 13% over the period.
• Eurozone 2026 EPS growth forecast18% y/yRaised from the previous 13% to 18%.
• Eurozone 2027 EPS growth forecast12% y/yRaised from the previous 10% to 12%.
• Bottom-up Eurozone EPS forecast17% y/yBased on J.P. Morgan sector analysts' aggregated forecasts covering about 85% of the index.
• UK 2026 EPS growth forecast18% y/yRaised from the previous 8% to 18%.
• UK 2027 EPS growth forecast5% y/yLowered from the previous 7% to 5%.
• Eurozone P/Eapproximately 15xThe report believes it can at least stay at the current level under its macro assumptions, and may move modestly higher.
• 2H26 oil price forecast$86/bbl in 3Q26, $80/bbl in 4Q26J.P. Morgan's commodities team lowered the oil price path, which, if realized, would support household purchasing power and reduce inflation pressure.
• MSCI AC World year-to-date performance+9% ytdGlobal markets have rebounded sharply from the March lows and reached new highs.
• Cyclicals relative to defensives performanceEurope +8%, U.S. +11%Excluding technology and AI-related sectors, cyclicals have outperformed defensives year to date.
• Mag-7 earnings and valuationNearly 60% earnings growth in Q1 2026, with relative P/E at a 10-year lowThe report believes tech volatility has been driven mainly by technicals and positioning, not by weakening fundamentals.

Impact & implications

The investment implication is that the upside case for European equities is shifting from pure valuation repair to a combination of earnings upgrades, recovering macro momentum, and broadening market breadth. In positioning, the report recommends continuing to hold high-beta and cyclical exposure, especially semiconductors, industrials, mining, banks, and consumer; at the same time, under a lower oil price and improving PMI scenario, it remains cautious on energy and defensive sectors. For Mag-7 and AI-related tech, the report does not recommend selling, but emphasizes that the second half should not rely only on the AI trade, and non-tech and European cyclical sectors may see broader participation.

Risks

• Renewed escalation in the Iran conflict or other geopolitical events could trigger an energy shock, lower risk appetite, and put renewed pressure on Europe's relative performance.
• If Brent does not fall as forecast and instead rises again, it could push up CPI, squeeze household purchasing power, and weaken support for P/E multiples.
• Rising bond yields or central bank tightening exceeding market pricing could compress valuations and hurt high-beta and cyclical sectors.
• If PMI, IFO, the economic surprise index, or consumer confidence fail to recover sustainably, the case for earnings growth and broadening market breadth would be damaged.
• Eurozone EPS upgrades may rely too heavily on base effects, energy, or a few sectors; if margin expansion fails to materialize, earnings forecasts face downside revision risk.
• If tariff relief falls short of expectations or trade policy tightens again, European exports and risk appetite could be weakened.
• If Chinese activity improves insufficiently or policy support falls short of expectations, it could drag on European cyclicals and mining trades.
• If Mag-7 and AI-related tech continue to decline due to crowded positioning, capex concerns, or equity supply pressure, global market sentiment could be affected.
• If market leadership cannot broaden beyond AI and a few large-cap stocks, the sustainability of Europe's and cyclicals' catch-up trade will diminish.

What to watch

• Whether Eurozone PMI, IFO, the economic surprise index, and consumer confidence continue to rise.
• Eurozone and UK 2026 and 2027 EPS forecasts, sector earnings revisions, margins, and changes in median EPS.
• Whether the SXXP and major European indices realize the additional 5%-10% upside.
• Whether Brent oil prices move toward the path of $86/bbl in 3Q26 and $80/bbl in 4Q26, and the transmission of oil prices into CPI and purchasing power.
• Whether bond yields, central bank rate hike expectations, and inflation expectations remain stable or continue to fall.
• Whether the Iran conflict, passage through the Strait of Hormuz, energy supply, and other geopolitical risks disrupt markets again.
• Whether the effective U.S. tariff rate declines further, and whether trade policy continues to ease.
• Whether Chinese activity indicators and policy signals improve, especially their impact on European cyclicals, mining, and export chains.
• Whether global equity market breadth, investor positioning in Europe, fund flows, and high-beta exposure broaden.
• DRAM spot prices, Hyperscaler capex, semiconductor earnings, and AI service monetization signals.