Goldman Sachs Europe Weekly: Flows continue favoring technology, industrials, and infrastructure, with EPS growth becoming the main driver of European sector returns

Overview

This Goldman Sachs Europe weekly report focuses on sector fund flows, sources of returns, earnings expectations, valuations, and cross-asset forecasts. The report argues that allocations in global sector funds have clearly tilted toward technology, industrials, and infrastructure, in line with structural themes such as AI investment, defense and infrastructure spending, energy security, and regionalization. The main driver of European sector performance is shifting from valuation changes toward EPS growth and earnings revisions.

Core views

The core views are as follows: first, technology, industrials, and infrastructure remain the strongest sector directions for global inflows; second, real estate, healthcare, and consumer-related sectors are the main sources of outflows and have a weaker earnings outlook; third, energy/commodities has been supported by inflows year-to-date in 2026, but flow strength may weaken amid easing energy prices and the reopening of straits; fourth, UK real estate has contrarian appeal given low valuations and a high dividend premium, but this depends on the UK fiscal risk premium and execution of growth policies; fifth, future European market returns are more likely to be driven by earnings growth rather than valuation expansion.

Analysis framework

The report adopts a top-down European equity strategy approach, combining EPFR global sector fund flows, STOXX 600 sector 12-month return decomposition, earnings growth and revisions, index valuations, thematic basket performance, and cross-asset forecasts to assess sector allocation and asset return prospects.

Methodology notes

• Fund flow analysisEPFR Global Sector Flows

  Observes global investor preferences through sector net inflows and outflows in ETFs and mutual funds.

  The report uses cumulative monthly flows of global sector funds since 2022, as well as average monthly flows year-to-date in 2026, to identify changes in flows toward technology, industrials, infrastructure, and energy/commodities.

• Return decompositionSTOXX 600 sector total-return decomposition

  Breaks sector total returns into contributions from EPS, valuation, and dividend changes.

  The report notes that over the past 12 months, most European sector performance has been driven mainly by earnings growth and earnings revisions rather than simply relying on valuation expansion.

• Earnings revisionsEPS growth and revisions

  Compares 2026E and 2027E EPS growth and 1-month and year-to-date earnings revisions across sectors.

  This framework is used to judge whether fund flows are consistent with fundamentals and to identify earnings pressure in outflow sectors such as real estate, healthcare, and consumer-related sectors.

• Thematic basketsGS Thematic Baskets

  Uses Goldman Sachs thematic baskets to measure relative performance, valuations, and earnings momentum across macro, fundamental, and shareholder-return themes.

  The report presents metrics including relative returns, EPS growth, sales growth, and valuations for baskets such as Capex Beneficiaries, Fiscal Infrastructure Spending, Cyclicals, and Defensives.

Asset mapping & comparison

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

• European technology and AI-related stocks/funds

  Structurally benefiting assets

  Strengths

  Global technology fund inflows are the strongest, with the AI revolution bringing a new growth engine and private-sector investment spending; technology sector EPS growth for both 2026E and 2027E exceeds 20%.

  Weaknesses

  Crowding and valuation sensitivity may increase.

  Comparison

  Compared with real estate, healthcare, and consumer-related sectors, technology has stronger fund flows and a better earnings backdrop.

  Risks

  A slowdown in AI capital expenditure, weakening earnings revisions, or a pullback in high valuations.

• Industrials, infrastructure, and defense-related assets

  Policy and capex beneficiary assets

  Strengths

  Industrial fund inflows are strong, supported by infrastructure spending, defense, and AI-related capital expenditure; industrial EPS growth expectations are stable.

  Weaknesses

  Short-term performance of some thematic baskets may be affected by macro volatility and the pace of fiscal execution.

  Comparison

  Compared with defensive sectors, these are more driven by the economic cycle and elasticity in investment spending.

  Risks

  Public investment falling short of expectations, tighter fiscal constraints, and weaker PMI.

• Energy/Commodities

  Short-term inflow recipient but may cool

  Strengths

  Fund flows have turned positive year-to-date in 2026, and energy sector 2026E EPS growth and year-to-date earnings revisions are very strong.

  Weaknesses

  The report believes easing energy prices and the reopening of straits may weaken subsequent inflows.

  Comparison

  Compared with technology and infrastructure, energy inflows are more likely to be influenced by short-term prices and geopolitical events.

  Risks

  Falling oil and gas prices, easing geopolitical risks, and negative 2027E growth due to a high earnings base.

• UK real estate

  Contrarian value opportunity

  Strengths

  Valuations are unusually low, and the dividend yield is about 200bp higher than the UK market; analysts see strong trends in demand for London office buildings and UK retail.

  Weaknesses

  The overall earnings outlook for real estate is weak, and the sector had previously experienced persistent outflows.

  Comparison

  Among outflow sectors, UK real estate has more valuation-recovery appeal than most consumer or healthcare-related areas.

  Risks

  A rising UK fiscal risk premium, failure in growth policy execution, or persistently high interest rates or real rates.

• Healthcare and consumer-related funds

  Source of funds and pressured sectors

  Strengths

  Some defensive characteristics may provide support when macro pressure rises.

  Weaknesses

  The report says related funds continue to see outflows, and these sectors have a weak earnings outlook.

  Comparison

  Compared with technology, industrials, and infrastructure, healthcare and consumer-related sectors lack the same support from fund flows and earnings revisions.

  Risks

  Weak consumer demand, continued earnings downgrades, and ongoing outflows.

• STOXX Europe 600

  European equity benchmark asset

  Strengths

  Overall earnings growth remains positive, valuations are lower than in the US market, and the 12-month target implies modest upside.

  Weaknesses

  12-month upside is only about 3.1%, with limited elasticity at the index level.

  Comparison

  Upside is lower than the report's forecasts for the S&P 500, MSCI Asia-Pacific ex-Japan, and gold.

  Risks

  Earnings growth falling short of expectations, rising macro volatility, and higher real rates putting pressure on valuations.

Key data

• STOXX Europe 600 forecastCurrent 640; 3 months 640; 6 months 645; 12 months 660; implied 12-month upside 3.1%Goldman Sachs cross-asset forecast as of June 25, 2026.
• FTSE 100 forecastCurrent 10530; 3 months 10600; 6 months 10800; 12 months 11000; implied 12-month upside 4.5%The UK market forecast is one of the relatively higher upside forecasts among major European indices in the report.
• S&P 500 forecastCurrent 7357; 12 months 8300; implied 12-month upside 12.8%Used for global cross-asset comparison, not the main European sector focus of this report.
• STOXX Europe 600 valuation12-month forward P/E of 14.7x, trailing 12-month EV/EBITDA of 9.5x, 12-month forward dividend yield of 3.3%, and ROE of 14.0%European market valuation is below the S&P 500's 20.6x forward P/E and 1.4% dividend yield.
• STOXX 600 earnings growth2026E EPS growth 15.3%, 2027E growth 10.0%, 2026/2027 CAGR 12.6%1-month EPS revisions are 0.3% for 2026E and 0.4% for 2027E; year-to-date revisions are 4.6% for 2026E and 2.8% for 2027E.
• Energy sector earnings2026E EPS growth 70.0%, 2027E -8.7%, 2026/2027 CAGR 24.6%Year-to-date 2026E EPS revisions for energy are as high as 55.8%, but the report believes strong fund flows may weaken as energy prices ease.
• Technology sector earnings2026E EPS growth 20.9%, 2027E growth 23.4%, 2026/2027 CAGR 22.1%Technology is the strongest direction for global sector fund inflows and is supported by the AI investment theme.
• Industrials sector earnings2026E EPS growth 15.8%, 2027E growth 16.0%, 2026/2027 CAGR 15.9%Industrials are driven by infrastructure spending, defense, and AI-related capital expenditure.
• Real estate sector earnings2026E EPS growth 1.8%, 2027E growth 4.3%, 2026/2027 CAGR 3.0%Real estate is one of the sectors with persistent outflows, but the report views UK real estate as a more interesting niche opportunity because of extremely low valuations and a high dividend premium.
• UK real estate valuation signalUK real estate dividend yield is about 200bp higher than the UK marketThe report says this premium is uncommon outside recessions, indicating valuations are at unusually low levels.
• Capex Beneficiaries thematic basketYear-to-date relative total return 13.5%, 2025E-2026E EPS growth 33.2%Related to themes benefiting from AI capital expenditure and investment spending.
• Gold forecastCurrent $4008/troy ounce; 12 months $5115/troy ounce; implied upside 27.6%One of the assets with relatively high upside in the report's cross-asset forecasts.

Impact & implications

In terms of investment implications, the report supports continuing to position around structural capital expenditure, AI, defense, infrastructure, and earnings upgrades, while in healthcare, real estate, and consumer-related areas that continue to see outflows, investors need to distinguish between fundamentally weak sectors and valuation-recovery opportunities. Overall upside for the broad European market is not high, so sector selection and earnings revisions matter more than index direction.

Risks

• Fund flows into energy/commodities may weaken as energy prices ease and straits reopen.
• Real estate, healthcare, and consumer-related sectors face risks of continued outflows and a weak earnings outlook.
• The UK real estate opportunity depends heavily on the UK fiscal risk premium, policy execution, and economic growth recovery.
• If AI capex, infrastructure spending, or defense spending falls short of expectations, the investment case for technology, industrials, and infrastructure may weaken.
• High macro volatility, rising real rates, and regionalization trends may suppress valuation expansion.
• The overall 12-month upside for European indices is limited; if EPS growth fails to materialize, the source of returns will be challenged.

What to watch

• Whether monthly inflows into technology, industrials, infrastructure, and energy/commodities in EPFR global sector fund flows continue.
• EPS revisions across STOXX Europe 600 sectors, especially in energy, technology, industrials, real estate, healthcare, and consumer-related sectors.
• The UK fiscal risk premium, UK growth policies, and demand data for London office buildings and UK retail.
• The impact of energy prices, geopolitics, and strait passage conditions on energy fund flows.
• Changes in European Composite PMI, financial conditions, real rates, and the euro exchange rate.
• The relative performance of Capex Beneficiaries, Fiscal Infrastructure Spending, Cyclicals, and Defensives within Goldman Sachs thematic baskets.