J.P. Morgan: Maintain Bullish View on European Equities, Recommend Buying on Dips

Overview

This J.P. Morgan equity strategy report explores the key conditions needed to drive European equities to outperform. The report notes that, despite recent volatility tied to geopolitical developments, major European benchmarks have staged a strong recovery. The firm maintains a bullish stance and recommends investors add positions during market dips, with a focus on low-volatility sectors. It analyzes underlying fundamentals and potential catalysts for further upside.

Core views

J.P. Morgan maintains a positive view on European equities and recommends adding positions on geopolitical-induced pullbacks. The report specifically notes that, two weeks ago, it advised focusing on low-volatility (Low Vol) stocks, which it expects to be resilient regardless of changes in bond yields. The STOXX Europe 50 (SX5E) and STOXX Europe 600 (SXXP) indices have rebounded significantly from lows triggered by the Iran conflict and are now near their YTD highs. To achieve a clearer breakout, several 'wildcards' need to materialize in the second half of the year: first, a shift toward dovishness by the Federal Reserve; second, a pronounced decline in oil prices by year-end next year; and third, the emergence of unmistakable 'green shoots' in the Chinese economy. The report argues that further upward momentum is supported by several factors: lighter investor positioning compared to pre-conflict levels, relatively attractive valuation (P/E multiples), and strong earnings momentum—supported by leading indicators. Although market breadth remains narrow (driven largely by AI), this is interpreted as a positive signal, given that many consumer stocks remain underowned, suggesting room to widen participation. Furthermore, the report dismisses geopolitical滞胀 (stagflation) concerns reminiscent of 2022, pointing to moderating wage growth, limited pricing power among corporates, and AI-driven labor market anxiety as factors suppressing inflation expectations.

Analysis framework

The report follows a top-down macro strategy framework: first assessing overall market environment and investor sentiment (e.g., positioning, valuation); then identifying key macro variables influencing market direction (e.g., Fed policy, oil prices, Chinese growth). It then evaluates earnings fundamentals (EPS forecasts) and structural market features (e.g., breadth, style rotation), culminating in an asset allocation recommendation (overweight/underweight). The analysis excludes certain risks (e.g., stagflation) by contrast with historical episodes (e.g., 2022) and employs forward-looking 'wildcards' to build out scenario analysis. It also integrates technical observations (e.g., resilience of low-volatility stocks) and flow-of-funds logic (investor positioning shifts) to provide multidimensional support for its investment recommendations.

Methodology notes

• Macroeconomic frameworkTaylor rule

  Monetary Policy Path Analysis

  Although the report does not directly cite the Taylor Rule equation, its core logic implicitly reflects how central banks—particularly the Fed—adjust policy rates based on macroeconomic data (inflation, growth). For instance, the discussion around a potential 'Fed pivot' hinges on whether realized policy paths diverge from current market pricing, a core application of Taylor-rule-style macro modeling.

• Business Cycle & Sentiment FrameworkCyclical Turning Point Analysis

  Identifying turning points in economic or market trends

  The report’s search for 'wildcards'—events that could shift the current trajectory (e.g., Fed pivot, sharp oil decline, China recovery)—is a textbook application of cyclical turning point analysis: assessing when and under what conditions the next expansion or contraction cycle may begin.

• Multi-Asset / Asset AllocationAsset Allocation

  Strategic allocation across asset classes (equities, bonds, cash)

  The report explicitly recommends an asset allocation (overweight equities, neutral bonds, underweight cash), a hallmark of multi-asset strategic research aimed at optimizing risk exposure across asset categories rather than focusing on single securities.

Key data

• MSCI Europe 2026 EPS Growth Forecast13%Based on IBES data, J.P. Morgan estimate
• MSCI Europe 2027 EPS Growth Forecast14%Based on IBES data, J.P. Morgan estimate, indicating accelerating trend
• Regional European Equity Allocation RecommendationOverweightJ.P. Morgan Equity Strategy Recommendation
• Global Information Technology YTD Performance43.6%Far exceeds other sectors, reflecting narrow market breadth

Impact & implications

This report implies that, for global investors, European equities remain an attractive allocation target post-short-term shock. Should the three cited catalysts—Fed pivot, lower oil prices, and Chinese recovery—partially or fully materialize, European markets could broaden and advance further. The current emphasis on low-volatility stocks may also presage future style rotation as risk appetite expands.

Risks

• Re-escalation of geopolitical tensions (e.g., Iran conflict) could trigger renewed market volatility
• Fed rate hikes could exceed current market expectations in magnitude and duration
• Oil prices may fail to decline as expected—or even rise further
• Chinese recovery may lag expectations, failing to show clear 'green shoots'

What to watch

• Federal Reserve policy commentary and forward guidance on interest rates
• World crude oil price trends
• Key Chinese economic data releases and effectiveness of policy stimulus
• Changes in European investor positioning
• Whether corporate earnings reports continue to confirm acceleration in earnings growth