J.P. Morgan raises its outlook for European equities, expecting 5-10% further upside in 2H

Overview

This is a J.P. Morgan European equity strategy outlook report focused on updating European targets and 2H positioning. The report believes global equity markets can remain constructive in 2H. Although the Mag-7 and SOX have weakened in the short term, this is viewed as primarily technical and positioning-driven, with fundamentals intact. European equities have reached their previous targets but may continue to rise amid accelerating earnings growth, improving macro activity indicators, falling oil prices, easing inflationary pressures, and global investors' underweight positioning in Europe.

Core views

The report's core views are as follows: First, global equities can still be bought on conflict-driven weakness; MSCI AC World has rebounded from its March low to a new high, up approximately 9% year to date. Second, market leadership in 2026 has been extremely narrow, with the 10 largest US stocks accounting for more than 40% of S&P 500 market capitalization and the Mag-7 approximately 35%, which may signal improving market breadth. Third, European equities have reached the previous year-end target, with the Stoxx600 reaching 630, but J.P. Morgan has raised its target and expects a further 5-10% upside. Fourth, Eurozone earnings growth is accelerating, with the 2026 EPS growth forecast raised to 18% and the 2027 forecast to 12%. Fifth, positioning continues to favor beta, consumer, semiconductors, industrials, mining, and banks, while remaining negative on energy, defensives, business services, software, media, and defense.

Analysis framework

The report uses a top-down equity strategy framework, combining regional index targets, EPS growth forecasts, P/E valuations, macro activity indicators, oil-price and inflation transmission, interest-rate paths, geopolitical risks, tariffs, Chinese activity, fund flows, and sector rotation to assess the 2H upside potential of European equities and sector positioning.

Methodology notes

• equity_strategyregional equity allocation

  Regional equity allocation

  Assesses whether Europe can regain outperformance by comparing earnings, valuations, macro momentum, fund flows, and positioning across European, Eurozone, US, and global equities.

• earnings_forecastEPS growth revision

  Upward revision to earnings growth forecasts

  The report raises its Eurozone 2026 EPS growth forecast from 13% to 18% and its 2027 forecast from 10% to 12%, while referencing bottom-up sector forecasts covering approximately 85% of index constituents by JPM.

• Valuation methodsforward P/E and relative valuation

  Forward P/E and relative valuation

  The Eurozone currently trades at approximately 15x P/E, about one standard deviation above its own historical level, but remains inexpensive relative to global equities; if oil and interest-rate pressures ease, valuations could remain stable or rise modestly.

• sector_rotationcyclicals versus defensives

  Rotation of cyclicals relative to defensives

  The report expects market participation to broaden in 2H, with cyclicals continuing to outperform defensives on support from earnings, PMIs, and macro improvement, particularly in consumer, semiconductors, industrials, mining, and banks.

Asset mapping & comparison

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

• European equities / Stoxx600

  Core bullish asset

  Strengths

  It has reached the previous target but is still expected to rise 5-10%; improving earnings growth, PMI recovery, falling oil prices, and investor underweighting provide support.

  Weaknesses

  Valuation has risen to approximately 15x P/E, potentially limiting further rerating.

  Comparison

  It remains inexpensive relative to global equities; after outperformance was interrupted by the impact of the Iran conflict, it may regain leadership if that impact continues to be priced out.

  Risks

  Renewed escalation of geopolitical conflicts, a rebound in oil prices, higher interest rates, failure of PMIs to recover, tariff pressure, or continued weakness in Chinese activity.

• Eurozone equities

  Regional allocation preference

  Strengths

  The 2026 EPS growth forecast was raised to 18% and the 2027 forecast to 12%; relative valuation versus global equities remains attractive.

  Weaknesses

  The current 15x P/E is approximately one standard deviation above its own historical level.

  Comparison

  Relative to US and global markets, Europe benefits from lower oil prices, underweight positioning, and improving market breadth.

  Risks

  An energy shock, unanchored inflation expectations, larger-than-expected central-bank rate hikes, or slower global growth.

• Mag-7 / SOX / Technology

  Still not a sell, but not the only 2H theme

  Strengths

  Mag-7 earnings are strong, with Q1 2026 earnings growth approaching 60%; relative P/E is the cheapest in 10 years, while AI services commercialization and hyperscaler capex remain supportive.

  Weaknesses

  Crowded positioning, overheated technical indicators, IPO supply, and higher earnings hurdles may create volatility.

  Comparison

  The report expects technology to continue performing, but broader market participation in 2H means the market will no longer be driven solely by AI trades.

  Risks

  Continued technical pullbacks, doubts about returns on AI capital expenditure, and market-structure volatility involving Korean leveraged ETFs.

• Consumer sectors

  Positive on beta and catch-up opportunities

  Strengths

  Consumer sectors have been among the clear laggards within cyclicals and have recently shown signs of participating in the rebound, leaving room to catch up.

  Weaknesses

  They have underperformed other cyclical subsectors for an extended period.

  Comparison

  Relative to already strong cyclical sectors such as banks, industrials, technology, and commodities, consumer sectors offer a catch-up opportunity.

  Risks

  A weaker-than-expected recovery in consumer confidence, insufficient improvement in real purchasing power, or a rebound in oil prices or inflation.

• Semiconductors

  Continue to favor

  Strengths

  A sharp rise in spot DRAM prices supports a multiyear semiconductor capex upcycle, while earnings delivery remains strong.

  Weaknesses

  The sector has already risen significantly, and technical indicators may be overheated.

  Comparison

  Relative to broader technology, semiconductors have clearer support from AI buildout and the memory-price cycle.

  Risks

  A slowdown in AI investment, falling memory prices, and valuation or positioning pressure.

• Industrials / Capital Goods

  Continue to favor

  Strengths

  Strong global corporate capex growth related to data centers, utility grids, and power generation supports demand for capital goods.

  Weaknesses

  Sensitive to the global capex cycle and management confidence.

  Comparison

  Relative to defensive sectors, industrials benefit more from global growth and infrastructure investment.

  Risks

  Delayed capital expenditure, higher interest rates, or slower global growth.

• Mining / Metals & Mining

  Bullish and viewing recent weakness as a buying opportunity

  Strengths

  European mining appears undervalued relative to copper prices, while copper fundamentals are supported by supply tightness and structural data-center demand.

  Weaknesses

  The sector has recently declined.

  Comparison

  European mining stocks have lagged copper prices, leaving room to catch up.

  Risks

  Lower copper prices, weaker-than-expected Chinese demand, or slowing global industrial activity.

• European Banks

  Positive allocation

  Strengths

  Banks benefit from PMIs, credit growth, improving balance sheets, better RoE, easing regulatory reform, and M&A activity.

  Weaknesses

  Sensitive to the macroeconomic and credit cycles.

  Comparison

  Banks and cyclicals have the strongest positive correlation with PMIs, while defensives have the most negative correlation.

  Risks

  Deteriorating credit conditions, slower loan growth, an unfavorable yield curve, or regulatory risks.

• Energy equities

  Cautious/sell

  Strengths

  Conflict-driven oil-price increases may provide short-term support to earnings forecasts.

  Weaknesses

  If oil prices continue to decline, energy equities may fall further; the report states that energy stocks have no valuation cushion relative to Brent.

  Comparison

  Relative to the broader European market, which benefits from falling oil prices, energy is under more direct pressure.

  Risks

  An unexpected rebound in oil prices could invalidate the cautious view in the short term.

Key data

• MSCI AC World year-to-date performance+9% ytdGlobal markets rebounded strongly from their March lows and reached new highs.
• Progress toward the previous European targetStoxx600 reached 630, up 13% since the publication of Year AheadThe previous target came from last November's Year Ahead outlook.
• Further upside potential for Europe5-10%J.P. Morgan updates its targets in this report and expects further upside.
• Eurozone 2026 EPS forecast18% y/yRaised from 13% to 18%; JPM's bottom-up forecast covering approximately 85% of index constituents is 17%.
• Eurozone 2027 EPS forecast12% y/yRaised from 10% to 12%.
• UK 2026 EPS forecast18% y/yRaised from 8% to 18%.
• UK 2027 EPS forecast5% y/yLowered from 7% to 5%.
• Current Eurozone valuationapproximately 15x 12m forward P/EApproximately one standard deviation above its own historical level, but still relatively inexpensive versus global equities.
• Oil-price changedown approximately 40% from the April peakLower oil prices help reduce CPI pressure and support household purchasing power.
• JPM 2H26 oil-price forecast$86/bbl in 3Q and $80/bbl in 4QThe commodities team lowered its 2H26 oil-price forecast due to higher estimates for global energy inventories.

Impact & implications

If the report's assessment proves correct, the investment narrative for European equities in 2H will broaden from a single AI theme to a combination of earnings recovery, macro improvement, falling oil prices, and cyclical rotation. For asset allocation, this implies increasing attention to European and Eurozone equities, particularly beta, consumer recovery, the semiconductor capital-expenditure cycle, industrial capital goods, mining exposure to copper demand, and improving bank credit conditions, while reducing reliance on oil-sensitive energy and defensive sectors.

Risks

• The Iran conflict or other geopolitical events could escalate again, causing an energy shock and a decline in risk appetite.
• Oil prices may fail to continue falling or may rise again, reviving CPI pressure and expectations for tighter central-bank policy.
• European activity indicators such as PMIs, IFO, and CESI may fail to recover as expected, weakening the earnings-growth assumptions.
• Higher bond yields or more central-bank rate hikes than expected could pressure valuation multiples.
• Tariffs may not decline further, or trade tensions may intensify again.
• Insufficient improvement in Chinese activity could weigh on European external demand and cyclical sectors.
• Crowded positioning in technology, the Mag-7, and semiconductors could create technical volatility.
• The Eurozone's 15x P/E is already above its historical average, potentially limiting further rerating.

What to watch

• Whether Eurozone PMIs, German IFO, and the Eurozone CESI continue to improve.
• The Brent price path and whether JPM's 2H26 oil-price forecast is realized.
• Whether US and Eurozone CPI continue to decline as the oil-price base effect fades.
• ECB and Fed rate expectations and changes in 2Y and 10Y bond yields.
• Whether Eurozone 2026 and 2027 EPS forecasts continue to be revised upward, particularly for Energy, Tech, Discretionary, and Financials.
• Whether global fund flows shift from underweight Europe to increased allocations to Europe.
• Whether the US effective tariff rate continues to decline.
• Whether China's manufacturing PMI and policy support improve.
• European bank loan growth, RoE, and regulatory/M&A developments.
• Spot DRAM prices, semiconductor earnings expectations, and the capex cycle.