European earnings surprises and revision sentiment strengthen, but elevated valuations and sector divergence remain key features

Overview

This is a summer “data-only update” edition of the weekly European strategy report, covering STOXX Europe 600 results, earnings expectations, sector recommendations, style and thematic performance, valuations, fund flows, geographic revenue exposure, and the macroeconomic environment. The clearest changes are stronger second-quarter earnings surprises, revision sentiment, and market reactions on reporting dates, although the report also shows that European valuations are in elevated historical ranges and that sector growth and revisions are highly divergent.

Core views

On earnings, the report notes that 2Q-26 results have so far delivered a positive surprise. Analysts expect STOXX Europe 600 first-half EPS to grow 15% year over year, or 8% excluding commodity sectors. Earnings sentiment, calculated as the number of analyst upgrades minus downgrades over the past month divided by all estimates during that month, has risen to its highest level in more than three years; companies' average price reaction relative to the market on reporting dates has also been stronger than historical norms. Together, these data indicate that both recent earnings outcomes and the strength with which the market has absorbed them have improved. Forward earnings are not rising uniformly across the board. Bottom-up STOXX Europe 600 EPS growth for 2026E and 2027E is 17.3% and 9.0%, respectively, with one-month revisions of 1.1% and 0.2% and year-to-date revisions of 6.4% and 3.6%; Goldman Sachs' top-down forecasts are 15% for 2026 and 5% for 2027. Excluding commodity sectors, growth for 2026E and 2027E is 11.5% and 11.9%, indicating that commodities provide a significant boost to overall 2026 growth. Major sectors' respective 2026E/2027E growth rates include: Energy 80.9%/-14.2%, Basic Resources 49.5%/12.2%, Autos and Parts 29.7%/24.2%, Technology 28.7%/26.7%, Chemicals 20.8%/3.8%, Industrials 19.1%/15.9%, Financial Services 15.9%/-1.1%, Construction and Materials 13.6%/12.5%, Banks 11.2%/13.9%, Telecoms 11.3%/11.6%, Utilities 10.3%/7.2%, Health Care 5.6%/8.9%, Insurance 7.5%/6.7%, Media 1.0%/10.0%, Travel and Leisure -5.2%/16.4%, and Real Estate 2.2%/4.4%. Revisions are similarly divergent: Energy's 2026E and 2027E estimates have been raised 65.9% and 23.9% year to date, respectively, while Technology has been raised 15.1% and 22.3%; Autos' 2027E estimate has been cut 24.0%, and Travel and Leisure's 2026E and 2027E estimates have been cut 16.4% and 13.0%, showing that high growth forecasts do not necessarily coincide with a consistent upward revision trend. Sector recommendations reflect this divergence. The Overweight list includes Banks, Construction and Materials, Food, Beverage and Tobacco, Personal Care and Grocery Stores, Retailers, Technology, Telecoms, Travel and Leisure, and Utilities; Neutral includes Health Care, Basic Resources, Energy, Financial Services, Industrials, Insurance, and Real Estate; Underweight includes Autos and Parts, Chemicals, Consumer Products and Services, Media, Property Insurance, Steel, Aerospace, Defense, and Renewable Energy. The report also lists trade baskets including capital-intensive versus capital-light, fiscal infrastructure, and high labor costs relative to SXXE excluding Financials, but the current input does not provide more detailed explanations of basket direction or target levels. The market structure section looks beyond sectors. The report calculates total returns for sectors and subsectors over one week, three months, and year to date, and compares the relative performance of cyclicals versus defensives, value versus growth, small caps versus large caps, momentum versus the market, and multiple thematic baskets. Its cyclical basket equally weights Industrials, Financials, and Consumer Discretionary; its defensive basket equally weights Utilities, Health Care, Communication Services, and Consumer Staples. The small-cap versus large-cap comparison uses the Russell 2000 relative to the SPX in the US and STOXX Small relative to STOXX Europe Large in Europe. The thematic section covers international exposure, domestic exposure, shareholder returns, and fundamental thematic baskets, comparing relative performance with the euro-denominated SXXP benchmark. Valuations show that the European market is not cheap. The report lists NTM EV/Sales at 2.0x, NTM EV/EBITDA at 8.7x, NTM P/B at 2.3x, NTM P/E at 14.6x, NTM free cash flow yield at 5.1%, cyclically adjusted P/E at 20.0x, and market-implied ERP at 4.1%. The corresponding valuation percentiles since 2000 are generally elevated, with the table showing percentiles of 93%, 86%, 94%, 71%, 81%, 79%, and 70%, respectively, and noting that a higher percentile represents a higher valuation. Regarding the interest-rate and credit valuation backdrop, the German 10-year government bond yield is 3.2%, the UK 10-year government bond yield is 5.1%, high-yield and investment-grade bond yields to maturity are 6.0% and 3.8%, respectively, and high-yield and investment-grade spreads are 256 basis points and 90 basis points, respectively. Geographic revenue exposure reveals differing levels of global sensitivity across European indices. The STOXX Europe 600's sales exposure to Europe, North America, Asia-Pacific, and emerging markets is 42%, 24%, 19%, and 15%, respectively; for the Euro Stoxx 50, the corresponding figures are 39%, 21%, 22%, and 18%. Among national indices, the FTSE 100's exposure to the UK, the rest of Europe, North America, Asia-Pacific, and emerging markets is 24%, 14%, 28%, 23%, and 11%, respectively, while the corresponding figures for the FTSE 250 are 56%, 13%, 14%, 8%, and 10%. The DAX figures are 20%, 25%, 25%, 16%, and 14%; CAC figures are 16%, 24%, 25%, 19%, and 16%; SMI figures are 6%, 23%, 36%, 19%, and 15%; and AEX figures are 9%, 17%, 22%, 38%, and 15%. Therefore, even among European indices, performance may reflect differing exposure to domestic economies, US dollar-area revenue, Asia-Pacific demand, and emerging markets. The flows and risk structure section uses EPFR data to track one-month rolling flows from global investors into European equities, calendarized flows, and differences between foreign and domestic investor flows into developed European equities; the report also shows the ownership structure of Euro-area equities. Derivatives and cross-sectional indicators include three-month, 25-delta normalized skew, the STOXX Europe 600's six-month average monthly return dispersion, and one-month average pairwise correlation. The report does not provide specific values for these charts in the available text, but uses them as a monitoring framework for assessing investor participation, tail pricing, and the degree of stock or sector differentiation. Macroeconomic forecasts provide a backdrop for comparing Europe with the rest of the world. Goldman Sachs expects Euro-area real GDP to grow 1.3% in 2025, 0.8% in 2026, and 1.2% in 2027; the corresponding figures are 0.3%, 0.9%, and 1.1% for Germany, 0.9%, 0.5%, and 0.8% for France, 0.7%, 0.8%, and 0.7% for Italy, 2.8%, 2.5%, and 1.8% for Spain, and 1.3%, 1.2%, and 1.4% for the UK. The corresponding figures are 2.1%, 2.1%, and 2.3% for the US, 1.2%, 0.8%, and 1.2% for Japan, and 5.0%, 4.6%, and 4.7% for China; global growth is forecast at 2.8%, 2.5%, and 2.8%. The report also uses the Goldman Sachs Current Activity Indicator, the Macro-data Assessment Platform Economic Surprise Index, and the Goldman Sachs Financial Conditions Index to help track growth momentum, changes in data relative to expectations, and financial conditions.

Analysis framework

The report applies a layered data framework progressing from earnings outcomes to market pricing and then to the macroeconomic backdrop: it first compares actual earnings and sales with expectations and measures earnings sentiment using analyst upgrades minus downgrades; it then breaks down sector growth, revisions, and allocation recommendations before examining the relative performance of sectors, styles, and thematic baskets; it subsequently assesses market conditions through valuation multiples, historical percentiles, fund flows, volatility, and correlations; finally, it combines geographic revenue exposure, GDP forecasts, and Goldman Sachs' proprietary macroeconomic indices to explain European assets' sensitivity to global economic variables.

Methodology notes

• Event-Driven Strategies and Behavioral FinanceExpectation Gaps/Expectation Management

  Earnings surprises and rolling earnings sentiment

  The report compares actual earnings with market expectations and measures whether market expectations are improving or deteriorating using the number of analyst upgrades minus downgrades over the past month, divided by all estimates.

• Valuation methodsPE/PEG valuation

  Next-12-month P/E and historical percentile

  The report uses NTM P/E and cyclically adjusted P/E to measure European equity pricing and compares them with historical distributions since 2000; the higher the percentile, the higher the valuation.

• Valuation methodsEV/EBITDA valuation

  NTM EV/EBITDA and EV/Sales

  The report supplements P/E with enterprise value multiples relative to forward revenue and EBITDA, facilitating comparisons of European market valuations from an operating-asset pricing perspective.

• Quantitative/Factor/Portfolio TheoryStyle factor analysis

  Comparison of value, growth, size, momentum, and cyclical-defensive styles

  Through the relative performance of style indices and equally weighted sector portfolios, the report examines whether returns are being driven by value or growth, small caps or large caps, momentum, or cyclical versus defensive characteristics.

• Sector/Industry Analysis Framework

  Breakdown of index sales by geographic exposure

  The report breaks down the sales revenue of major European indices into domestic, rest of Europe, North America, Asia-Pacific, and emerging markets to characterize each index's sensitivity to demand across regions.

• Quantitative/Factor/Portfolio Theory

  Return dispersion and pairwise correlation analysis

  Dispersion measures differences in constituent returns, while average pairwise correlation measures the degree to which stocks move together; the report uses these metrics to assess the scope for stock selection and the degree of market co-movement.

• Macroeconomic framework

  CAI, MAP Economic Surprise Index, and GSFCI

  The report combines the Goldman Sachs Current Activity Indicator, an indicator of macroeconomic data surprises relative to expectations, and the Financial Conditions Index to monitor real-time growth momentum, expectation gaps in data, and financing conditions, respectively.

Asset mapping & comparison

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

• STOXX Europe 600

  The report's primary European equity benchmark, used to analyze earnings, valuations, sector performance, revenue exposure, and market structure.

  Strengths

  2Q-26 earnings have so far delivered a positive surprise, earnings sentiment has risen to its highest level in more than three years, and 2026E EPS growth is 17.3%.

  Weaknesses

  2027E EPS growth falls to 9.0%, and multiple valuation indicators are at elevated historical percentiles.

  Comparison

  Excluding commodity sectors, 2026E EPS growth falls from 17.3% overall to 11.5%, indicating a substantial contribution from commodities.

• European Overweight sector group

  Goldman Sachs' Overweight sectors include Banks, Construction and Materials, Food, Beverage and Tobacco, Personal Care and Grocery Stores, Retailers, Technology, Telecoms, Travel and Leisure, and Utilities.

  Strengths

  Some sectors have relatively high earnings growth or positive revisions; for example, Technology's 2026E and 2027E growth rates are 28.7% and 26.7%.

  Weaknesses

  Growth trajectories are not consistent within the group; for example, Travel and Leisure EPS is expected to decline 5.2% in 2026E.

  Comparison

  Relative to the Neutral and Underweight sectors, this is the report's explicitly identified preferred allocation tier.

• European Underweight sector group

  Goldman Sachs' Underweight sectors include Autos and Parts, Chemicals, Consumer Products and Services, Media, Property Insurance, Steel, Aerospace, Defense, and Renewable Energy.

  Strengths

  Some sectors still have relatively high nominal growth forecasts; for example, Autos and Parts growth is projected at 29.7% for 2026E and 24.2% for 2027E.

  Weaknesses

  Earnings revisions may be weak; Autos' 2027E EPS forecast has been cut 24.0% year to date, while Media's 2026E and 2027E forecasts were both cut 1.3% over the past month.

  Comparison

  The report ranks these sectors below the Overweight and Neutral sectors but does not explain the reasons for each rating individually in the available text.

Key data

• STOXX Europe 600 first-half EPS growth forecast15%Analyst expectation; 8% excluding commodity sectors
• STOXX Europe 600 EPS growth2026E 17.3%; 2027E 9.0%Bottom-up forecasts; Goldman Sachs' top-down forecasts are 15% and 5%, respectively
• STOXX Europe 600 EPS revisionsOne month: 2026E 1.1%, 2027E 0.2%; year to date: 6.4%, 3.6%Euro-denominated
• Energy EPS growth2026E 80.9%; 2027E -14.2%Following high growth in 2026, the 2027 forecast turns negative
• Technology EPS growth2026E 28.7%; 2027E 26.7%Year-to-date EPS revisions are 15.1% and 22.3%, respectively
• European NTM P/E14.6xAt the 71st historical percentile since 2000
• European cyclically adjusted P/E20.0xLong-term valuation metric
• European market-implied ERP4.1%Pan-European market-implied equity risk premium
• Credit market pricingHigh-yield bond YTM 6.0%, spread 256bp; investment-grade bond YTM 3.8%, spread 90bpInterest-rate and credit indicators in the European valuation backdrop
• STOXX Europe 600 sales exposureEurope 42%, North America 24%, Asia-Pacific 19%, emerging markets 15%Breakdown by geographic source of sales revenue
• Euro-area real GDP forecast2025 1.3%, 2026 0.8%, 2027 1.2%Goldman Sachs forecast
• Global real GDP forecast2025 2.8%, 2026 2.5%, 2027 2.8%Goldman Sachs forecast

Impact & implications

The report's data combination implies that recent European earnings delivery and expectation revisions provide fundamental support, but that support is uneven: growth or revisions are stronger in commodities, Technology, and some financial sectors, while other sectors face downgrades or slowing growth. Meanwhile, several European valuation indicators are at elevated historical percentiles, so the report places greater importance on sector selection, style rotation, global sales exposure, fund flows, and macroeconomic variables than on a single broad-market direction.

What to watch

• Monitor whether one-month rolling earnings sentiment can remain at its highest level in more than three years and whether 2026E and 2027E EPS revisions continue to improve.
• Monitor changes in the relationship between the European Composite PMI, the STOXX Europe 600, and the performance of cyclicals relative to defensives.
• Monitor the relationship between the US 10-year Treasury yield and the performance of European value stocks relative to growth stocks.
• Monitor the relationship between EUR/USD and the performance of European small caps relative to large caps.
• Monitor EPFR's one-month rolling flows into European equities from global, foreign, and domestic investors.
• Monitor the tail pricing and market differentiation reflected in normalized skew, return dispersion, and average pairwise correlation.
• Monitor the signals from the CAI, MAP Economic Surprise Index, and GSFCI regarding growth momentum, expectation gaps, and changes in financial conditions.