Repairing Europe's structural investment gap supports cyclicals and the infrastructure value chain

Overview

The report updates key themes in global equity markets, particularly Europe. JPMorgan believes geopolitical uncertainty, energy-dependence risks, changes in U.S. policy orientation, and competition from China are driving Europe away from a focus on efficiency and economies of scale toward security, resilience, and strategic autonomy. This shift will create a long-term capital expenditure cycle supported by budgets, procurement, and regulation.

Core views

The report maintains a positive stance on equity markets and expects indices to continue reaching new highs during the year. MSCI AC World has delivered total returns of approximately 14% year to date, with market participation broadening from a small number of leaders to a wider range of stocks, while cyclicals in both Europe and the United States have materially outperformed defensives. Europe's core opportunity lies in addressing long-standing investment gaps in defense, grids, and industrial capacity; the most investable areas are physical infrastructure, including electrical equipment and cables, regulated utilities, construction materials, and steel. In strategic technology, the report favors semiconductor equipment and hardware; in defense, it recommends focusing on new capabilities rather than traditional platforms.

Analysis framework

The analysis uses the growth-inflation mix, earnings trends, market breadth, valuations, and policy commitments as its main framework. It combines European energy independence, German fiscal stimulus, artificial intelligence capital expenditure, defense procurement, and industrial protection policies to identify industry and company value chains with multi-year demand persistence.

Methodology notes

• Macro and market frameworkGrowth-inflation trade-off

  Assessing equity-market risk appetite and sector style through the relative evolution of growth and inflation.

  The report believes that the current growth-inflation mix remains supportive of risk assets, with corporate earnings providing important support for market gains.

• Thematic investingPolicy-driven capital expenditure cycle

  Assessing demand durability through multi-year fiscal budgets, government procurement, and regulatory measures.

  Unlike a typical short-cycle recovery, European infrastructure and strategic-capability investment is supported by multiple policy programs, creating a more durable spending cycle.

• Market technicalsMarket breadth

  Monitoring the proportion of index constituents outperforming the index to determine whether gains are supported by broader participation.

  The proportion of stocks outperforming the MSCI AC World Index has rebounded from a recent low of about 25% to slightly above 40%. The report believes continued normalization in breadth would help sustain index performance.

Asset mapping & comparison

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

• European equity market

  Direct beneficiary

  Strengths

  Strong earnings expectations, improving market breadth, potentially easing financial conditions, and policy-supported demand expansion from long-term investment gaps.

  Weaknesses

  There may be a lag between policy commitments and actual spending and corporate revenue.

  Comparison

  Compared with the United States, Europe has deeper initial underinvestment in defense, grids, and industrial capacity, potentially leaving greater room to close the gap.

  Risks

  Weaker macroeconomic growth, delayed policy execution, geopolitical shocks, and a reversal in market risk appetite.

• Capital goods, electrical equipment, and cables

  Core beneficiary

  Strengths

  The most direct beneficiaries of transmission and distribution grid upgrades, industrial automation, energy security, and infrastructure projects.

  Weaknesses

  Sensitive to the pace of project tendering, permitting, supply chains, and capital expenditure implementation.

  Comparison

  Compared with pure renewable-energy generation, equipment and cables have a clearer path to benefit from grid investment.

  Risks

  Construction delays, raw-material cost volatility, and order execution falling short of expectations.

• Regulated utilities

  Low-beta participation approach

  Strengths

  Own network assets and can benefit from transmission and distribution expansion and long-term regulated capital expenditure.

  Weaknesses

  Returns are affected by regulated-return mechanisms, interest rates, and balance-sheet constraints.

  Comparison

  Compared with capital goods companies, utilities typically offer lower-volatility exposure to grid investment.

  Risks

  Lower regulated returns, rising financing costs, and policy uncertainty.

• European semiconductors and equipment

  Strategic technology beneficiary

  Strengths

  Relatively resilient earnings, limited expectation of significant supply additions before 2028, and benefits from artificial intelligence capital expenditure and supply-chain autonomy.

  Weaknesses

  Affected by global technology capital expenditure cycles and valuation volatility.

  Comparison

  Europe's competitive advantages are concentrated in upstream areas such as semiconductor equipment and industrial hardware, rather than U.S.-led platforms and hyperscale cloud ecosystems.

  Risks

  Cooling artificial intelligence investment, trade restrictions, cyclical demand declines, and supply-chain disruptions.

• European defense

  Selective beneficiary

  Strengths

  NATO spending commitments, EU joint procurement, and ammunition restocking provide a long-term demand backdrop; the sector's valuation pullback has improved its risk-reward profile.

  Weaknesses

  Traditional platforms may still lack relative attractiveness, while the effects of prior crowded positioning have not fully dissipated.

  Comparison

  The report favors modernization capabilities such as drones, electronic warfare, ammunition replenishment, and space rather than traditional warships and heavy armored vehicles.

  Risks

  Delays in budget appropriations, fragmented procurement execution, renewed valuation crowding, and changes in the geopolitical situation.

• Construction materials and steel

  Infrastructure-expansion beneficiary

  Strengths

  Supported by investment in transport, housing renovation, grids, and industrial upgrades, and may also benefit from European localization and the Carbon Border Adjustment Mechanism.

  Weaknesses

  Relatively sensitive to economic activity, energy costs, and the pace of project starts.

  Comparison

  Compared with a single policy theme, these industries can benefit simultaneously from multiple physical infrastructure investment directions.

  Risks

  Demand falling short of expectations, rising energy prices, raw-material volatility, and changes in trade policy.

Key data

• MSCI AC World year-to-date total returnApproximately 14%The report states that global equities are near record highs.
• European cyclicals versus defensives year-to-date performanceApproximately +10%This indicates that cyclical sectors have clearly led in 2026.
• U.S. cyclicals versus defensives year-to-date performanceApproximately +12%Cycclical leadership persists even excluding technology and artificial intelligence exposure.
• Eurozone earnings per share growth forecast18% in 2026; 12% in 2027This provides earnings support for the European equity view.
• Germany structural primary fiscal deficit forecast-0.6% of GDP in 2025; -2.2% in 2026; -2.6% in 2027The scale of fiscal easing over two years is approximately 2% of GDP.
• Germany infrastructure and climate fund€500bnThe report views this as an important policy anchor for German fiscal policy and infrastructure investment.
• Potential GDP boost from Germany's Special Fund for Infrastructure and Climate NeutralityApproximately 0.5%Based on the German Ministry of Finance's estimate of the 2026 spending path.
• Italy nuclear energy targetMeeting 11%–22% of energy demand by 2050The report notes that some European countries are extending the lives of nuclear power plants and supporting new-build projects.

Impact & implications

Investors can use policy-supported physical infrastructure in Europe as a long-term expression of a cyclical preference: prioritize grids, electrical equipment, cables, automation, engineering and construction, building materials, steel, and regulated utilities. The pace at which German fiscal spending moves from approval to execution will determine the timing of earnings realization. In strategic technology, Europe is better positioned to participate in artificial intelligence and supply-chain autonomy through semiconductor equipment, industrial automation, sensors, power electronics, and communications infrastructure, rather than replicating the U.S. platform-technology model. The valuation pullback in defense improves the risk-reward profile, but investors should avoid broadly chasing traditional platforms and instead focus on modernization capabilities.

Risks

• The period from European fiscal and industrial policy commitments to actual appropriations and project execution could be longer than expected.
• An escalation in geopolitical tensions could disrupt energy, supply chains, and overall market risk appetite.
• Slower economic growth or renewed tightening in financing conditions could weaken demand for cyclical industries and infrastructure investment.
• Volatility in energy, raw materials, and interest rates could compress earnings for capital goods, construction materials, steel, and utilities.
• If artificial intelligence capital expenditure, semiconductor demand, or defense procurement is weaker than expected, earnings support for related themes could decline.
• Trade protectionism, regulatory adjustments, and cross-border supply-chain restrictions could have uneven effects across different industrial value chains.

What to watch

• Whether Eurozone earnings revisions, market breadth, and cyclicals' relative performance versus defensives continue.
• Progress in the transmission of Germany's €500bn fund, wider budget deficits, and domestic manufacturing orders into the real economy.
• Actual implementation of European transmission and distribution grid investment, renewable-energy grid connections, nuclear-life extensions, and new-build projects.
• The pace of execution of NATO member spending commitments, EU joint procurement, and ammunition-restocking contracts.
• Electricity demand from artificial intelligence and data centers, semiconductor capital expenditure, and the timetable for supply expansion.
• The impact of CBAM, localization requirements, and other European industrial policies on domestic supply chains and cost structures.