European Style Cycle Remains in 'Recovery', Nearing the 'Expansion' Threshold

Overview

The report uses the European Composite Macro Indicator (CMI) to track the economic cycle and equity style performance. The CMI rose 3 points month-on-month in August, driven by improvements in the year-on-year change in European 10-year government bond yields, the global EPS revision ratio, and Germany's IFO indicator. Europe remains in the 'Recovery' phase and is only about 2 points away from the 'Expansion' phase.

Core views

During the 'Recovery' phase, the model favors value, upward momentum, low quality, high risk, and small- and mid-cap factors. Screening results improved for Travel & Leisure, Spain, and Finland; Energy and Norway were downgraded due to weakening momentum and earnings/sales revisions. Strong, broad-based earnings growth and upgraded third-quarter expectations support a transition toward 'Expansion', but growth indicators such as GDP require confirmation.

Analysis framework

The research divides the European economic cycle into four phases and combines CMI changes with equal-weighted rankings of value, growth, momentum, quality, risk, and size factors across sectors, countries, and stocks to form a relative-performance screening and style-allocation framework.

Methodology notes

• Macro and Style RotationEuropean Style Cycle

  Using economic-cycle phases to guide style allocation

  Maps the direction and rate of change in macro indicators to different cycle phases, and assesses equity styles and cross-asset relative performance in each phase.

• Macro IndicatorEuropean Composite Macro Indicator (CMI)

  A composite signal of six macro inputs

  Key inputs include European leading indicators, Germany's IFO, changes in 10-year European government bond yields, producer-price inflation, GDP forecasts, and the global EPS revision ratio.

• Quantitative Stock SelectionEqual-Weighted Factor Screening

  Multi-factor relative ranking

  Stocks are screened using equal-weighted rankings of value, growth, momentum, quality, risk, and size; the results are indicative screens rather than recommendation lists.

• BacktestingHistorical Backtesting

  Hypothetical historical performance testing

  The report explicitly states that results are based on historical backtests and do not represent the performance of any actual account or fund, nor do they reflect actual transaction costs, management fees, or real-world investment-decision constraints.

Asset mapping & comparison

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

• European Equities

  Rising CMI readings are generally associated with improved European equity performance and equity performance relative to bonds.

  Strengths

  Improving earnings revisions, strengthening macro indicators, and broad relative leadership by style Top stocks.

  Weaknesses

  The Recovery phase has lasted significantly longer than the historical average, reducing the comparability of typical historical paths.

  Comparison

  Relative to bonds, European equity performance is more sensitive to changes in the CMI.

  Risks

  Insufficient growth confirmation, persistently elevated inflation, and changes in risk premia could weaken performance.

• European Value, High-Risk, Low-Quality, and Small- and Mid-Cap Styles

  These are the principal style exposures favored by the model during the 'Recovery' phase.

  Strengths

  The current factor framework is aligned with the macro phase, and the Top basket has recently outperformed.

  Weaknesses

  High-risk and low-quality styles are sensitive to growth expectations, interest rates, and market risk appetite.

  Comparison

  They are more favored by the model than growth, high-quality, low-risk, and large-cap styles.

  Risks

  Style advantages may reverse quickly if macro momentum declines or risk aversion intensifies.

• Travel & Leisure, Spain, Finland

  Upgraded from Neutral to Top screens for the 'Recovery' phase in August.

  Strengths

  Travel & Leisure and Spain are supported by stronger momentum; Spain also benefits from improved risk factors; Finland returned to Top driven by value, growth, and risk factors.

  Weaknesses

  The conclusions are based on quantitative screens and do not replace individual fundamental research.

  Comparison

  Their screening signals are stronger than those for Energy and Norway.

  Risks

  Momentum reversal, weaker macro growth, and sector-specific fundamental changes.

Key data

• Monthly CMI Change+3 pointsRose month-on-month in August.
• Current Cycle PhaseRecovery, Month 30The longest-lasting single phase in history.
• Distance to 'Expansion' PhaseApproximately 2 pointsConfirmation from growth indicators is the key condition for completing the transition.
• Monthly Top versus Bottom Excess Return1.3%Excess price return of Recovery-style Top stocks over Bottom stocks last month.
• Sector and Country Breadth17/20 sectors; 7/8 countriesTop stocks outperformed Bottom stocks in most sectors and countries.
• Global Investor Allocation to EuropeNet overweight of 2%July survey results; over the next 12 months, a net 2% of investors intend to underweight Europe.

Impact & implications

If macro growth, yields, and earnings revisions continue to improve in tandem, European markets may move further from Recovery toward Expansion, with risk appetite, cyclical styles, and relatively high-beta exposures likely to continue benefiting. Conversely, if GDP forecasts, corporate loan demand, or leading indicators fail to improve, the risk of a prolonged current phase or a reversal in style rotation will increase.

Risks

• The assessment of an 'Expansion' phase has not yet received comprehensive confirmation from growth indicators.
• Pan-European producer-price inflation was the only negative CMI contributor this month and is expected to potentially remain elevated through 2027.
• Weak corporate loan demand and declining household mortgage demand could weigh on Germany's IFO and the growth outlook.
• Backtest results are subject to inherent limitations, including look-ahead bias, omitted transaction costs, and lack of replicability in actual execution.
• Model screens are indicative only and do not constitute individual stock or portfolio recommendations.

What to watch

• Whether the year-on-year change in European 10-year government bond yields remains positive.
• Whether consensus GDP forecasts can shift from flat to improving.
• The global EPS revision ratio and the breadth of upward revisions to third-quarter earnings expectations.
• Subsequent readings for Germany's IFO, European leading indicators, and corporate credit demand.
• Whether momentum and risk factors for Travel & Leisure, Spain, and Finland persist.
• Whether Energy and Norway can reverse the deterioration in momentum and earnings and sales revisions.