Maintain a positive equity-market view, focusing on multi-year capital expenditure opportunities from Europe’s shift from efficiency to resilience

Overview

The report maintains a positive stance on equity markets, expecting the growth-inflation trade-off to remain favorable for risk assets. Corporate earnings, improving market breadth, and cyclical-sector leadership should drive indices to further record highs by year-end. Europe is a focal point for thematic allocations: geopolitics, energy dependence, supply-chain competition, and shifting policy priorities are pushing Europe away from efficiency and scale toward security, resilience, and strategic autonomy.

Core views

Europe’s long-term investment gap is the core investment framework. Multi-year budgets, joint procurement, regulation, and industrial policy will support capital expenditure in defense, energy systems, power grids, industrial capacity, digital infrastructure, and critical supply chains, potentially lasting beyond a typical economic cycle. The report favors beneficiaries centered on physical infrastructure, including electrical equipment, cables, regulated utilities, building materials, and steel; it also favors semiconductor equipment, industrial automation, and European strategic technology capabilities.

Analysis framework

The analysis combines the macro growth-inflation mix, earnings expectations, market breadth, relative performance, valuation, and policy implementation progress to identify beneficiaries across European policy-supported capital expenditure cycles, distinguishing between high-beta direct beneficiaries and low-beta alternative allocations.

Methodology notes

• Macro and marketGrowth-inflation trade-off

  The impact of growth and inflation conditions on risk assets

  The report believes the current growth-inflation mix continues to support equities, with earnings performance as the main tailwind.

• Thematic investingInvestment-gap framework

  Closing investment gaps and funding modernization after prolonged underinvestment

  Europe has long underinvested in defense, power grids, and industrial capacity. Policy commitments aim to close these gaps, so the capital expenditure cycle may persist for multiple years.

• Market technicalsMarket breadth and relative strength

  The breadth of participation in market gains and the relative performance of cyclical versus defensive sectors

  Market breadth is recovering from low levels, while cyclicals remain ahead of defensives, which is used to assess the sustainability of the rally.

Asset mapping & comparison

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

• European equities

  Core allocation asset

  Strengths

  Improving earnings expectations, broadening market participation, policy-supported capital expenditure, and expectations of easier financial conditions.

  Weaknesses

  There may be a lag between policy and actual spending, as well as between spending and corporate earnings delivery.

  Comparison

  Compared with the United States, Europe has larger investment gaps in defense, power grids, and industrial capacity, creating more apparent catch-up potential.

  Risks

  Geopolitical shocks, delays in policy implementation, weaker economic growth, and valuation volatility.

• Capital goods, electrical equipment, and cables

  Direct beneficiaries of energy security, grid upgrades, and industrial investment

  Strengths

  Grid transmission and distribution upgrades and electrification demand provide a stable demand foundation for the coming decade.

  Weaknesses

  Sensitive to project approvals, investment progress, and supply-chain constraints.

  Comparison

  Compared with individual renewable power-generation segments, electrical equipment and cables offer more direct exposure to power-grid capital expenditure.

  Risks

  Changes in regulatory returns, project delays, and raw-material cost volatility.

• Regulated utilities

  A low-beta route to participate in grid investment

  Strengths

  They own network assets and can benefit from transmission and distribution upgrades.

  Weaknesses

  Growth sensitivity is typically lower than for equipment suppliers.

  Comparison

  Compared with capital-goods companies, they offer lower volatility but relatively limited upside sensitivity.

  Risks

  Regulatory policy, financing costs, and changes in allowed rates of return.

• Semiconductor equipment and technology hardware

  Beneficiaries of strategic technology and AI capital expenditure

  Strengths

  Europe has competitive advantages in semiconductor equipment, industrial automation, and power electronics; fundamentals are relatively resilient.

  Weaknesses

  Sensitive to the global semiconductor cycle and external demand.

  Comparison

  Compared with U.S. platform and cloud-computing models, European exposure is more concentrated upstream and in industrial applications.

  Risks

  Slower AI investment, trade restrictions, rising supply, and valuation volatility.

• Modernized defense capabilities

  Selective beneficiaries of defense budgets and joint procurement

  Strengths

  New capabilities, including drones, electronic warfare, ammunition replenishment, missiles, air defense, and space, are supported by policy demand.

  Weaknesses

  Traditional heavy platforms are relatively less attractive.

  Comparison

  The report recommends selecting modernized capabilities rather than broadly chasing the entire defense sector or traditional platforms.

  Risks

  Budget and procurement execution falling short of expectations, a return of crowded trades, and geopolitical changes.

• Building materials and steel

  Beneficiaries of German and European infrastructure rebuilding

  Strengths

  Transportation, bridges, housing renovation, and industrial upgrades will drive demand.

  Weaknesses

  Sensitive to the macro cycle, energy prices, and raw-material costs.

  Comparison

  These are common beneficiary sectors at the physical-infrastructure level.

  Risks

  Delayed project implementation, weak end demand, and changes in trade-protection policies.

Key data

• MSCI AC World year-to-date total returnApproximately 14%The report states that global equity markets are near historic highs.
• Year-to-date performance of European cyclicals relative to defensivesApproximately 10% aheadU.S. cyclicals are approximately 12% ahead.
• Eurozone EPS growth forecast18% in 2026; 12% in 2027A key earnings basis for the report’s continued positive view on European indices.
• Germany structural primary fiscal deficit forecast-0.6% of GDP in 2025; -2.2% in 2026; -2.6% in 2027Equivalent to fiscal easing of approximately 2% of GDP over two years.
• Germany infrastructure and climate fund€500bnThe report considers the commitment genuine; the key issues are timing of execution and planning.
• Potential GDP boost from Germany’s special fundApproximately 0.5%Based on Finance Ministry estimates.

Impact & implications

For allocations, the report recommends viewing European policy themes as multi-year opportunities rather than short-cycle trades. Grid equipment, cables, and electrical capital goods are the most direct beneficiaries of energy-security and electrification investment; regulated utilities offer a lower-beta participation route. German fiscal expansion supports transportation, digital infrastructure, power grids, industrial upgrades, and building-renovation value chains. In strategic technology, Europe is better positioned through semiconductor equipment, industrial automation, sensors, power electronics, and communications infrastructure rather than by replicating the U.S. platform-AI investment model.

Risks

• The approval, planning, and actual spending of European fiscal and industrial policies may lag market expectations materially.
• Geopolitical escalation, energy-price volatility, or global trade frictions could weaken risk appetite and corporate profits.
• Cyclical sectors have already delivered strong relative performance; rotation could reverse if growth expectations decline.
• AI capital expenditure, semiconductor demand, or power-grid project investment falling short of expectations would affect earnings from related themes.
• Although defense themes have experienced a valuation pullback, procurement pacing, budget delivery, and sector crowding could still create volatility.

What to watch

• Eurozone and European corporate earnings revisions, market breadth, and the relative strength of cyclical equities.
• Planning, disbursement, orders, and actual spending progress for Germany’s €500bn fund.
• European power-grid investment, transmission and distribution projects, renewable-energy grid connections, and changes in nuclear-power policy.
• NATO defense-spending commitments, EU joint procurement, and progress on ammunition-replenishment contracts.
• Power demand driven by AI and data centers, semiconductor-equipment orders, and memory supply-demand conditions.
• Eurozone manufacturing PMI, economic surprise indices, and changes in financial conditions.