Deutsche Bank upgrades Europe to positive versus the U.S. Here’s why
European equities 15 years’ of underperformance in comparison to the U.S. has come to an end, according to Deutsche Bank as it upgraded its stance on the region from neutral to positive. “Tactically, we expect further upside for European equities until year-end,” strategists at the bank said in an October note, putting it down to “cheaper valuations, higher diversification and a strong fiscal impulse.” Amid a recent rally on U.S. stocks, which saw the S & P 500 and Nasdaq Composite hit record levels last week , and general inflation of valuations as talk of an AI bubble mounts , Deutsche Bank notes that investors may to be searching elsewhere for opportunities — and it’s betting Europe is the place to look. “Within the bigger RoW [rest of the world] blocks, Europe is the only region still trading at undemanding valuations compared to its own history,” the note said. Deutsche Bank’s upgrade to its stance on Europe follows a downgrade in July. It now projects gains of up to 16% across major European indices in 2026 with sectors such as autos, energy and materials contributing positively to index-level earnings growth. In all, the Stoxx 600 could see up to 12% earnings growth in 2026, per the bank. “As opposed to most other regions, we find valuations in Europe undemanding, especially in the Small and Mid Cap space,” the strategists said. The Stoxx 600 is up almost 11% year-to-date. USB is also backing Europe. Gerry Fowler, who leads the firm’s U.S. and European equity and derivative strategy team, told CNBC’s ” Europe Early Edition ” on Monday that the bloc’s weakness is concentrated in its net exports — meaning there’s opportunity in domestic markets that are less exposed to tariff and currency volatility. Indeed, UBS is forecasting annualized returns of 10% for the Stoxx 600, “which Europe hasn’t seen for a while,” Fowler said. How regional heavyweights may fare Deutsche Bank is particularly bullish on its home market as spending picks up pace following the approval of the 2025 budget in September, which it said “should accelerate Europe’s improving manufacturing sentiment.” Germany, typically a European heavyweight, is also set to spend billions on defense over the next year. Only a fraction of this is destined for U.S. orders, according to the note. “This means that a high share of orders will be directed to European manufacturers. The placement of orders, especially in Defence, already creates a positive demand impulse whilst the real spending takes place only upon delivery,” Deutsche Bank noted. While political volatility in France could lead to greater uncertainly in the short-term, Deutsche Bank ultimately sees global economics having a bigger influence on French stocks. “We remain constructive on equity markets and see 14% upside for the CAC until end 2026,” it said. Germany’s DAX and France’s CAC 40 indexes are up almost 22% and 7.5% year to date, respectively. Elsewhere, European exit markets appear to be picking up . Sweden in particular has experienced an IPO boom as private companies go public, most recently with security services firm Verisure raising 3.2 billion euros ($4.25 billion) when it listed last week. Deutsche Bank still expects the U.S. to perform well, as growth outpaces expectations, but it’s also considering a possible worsening of the debt ratio Stateside. Concentration risks are also greater in the U.S., with the largest members of the S & P 500 accounting for a third of the index’s weight versus 14% for the Stoxx 600. Without the S & P 500’s top seven companies, the Stoxx 600 would have outperformed the U.S. index over the past five years, strategists said. They added: “We believe we are at an inflection point in the structural outperformance of US vs EU equities witnessed over the past 15 years. Underlying shifts in valuations, debt levels, market concentration, and even risk profiles are paving the way for a potential resurgence in European equity appeal.”
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