JPMorgan Strategist: European Stock Valuations Have Priced In Earnings Improvement; Financials and Industrials Still Offer Relative Edge
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JPMorgan strategist Madison Faller warns that European equities now trade at 15x forward P/E — nearly 20% above the 20-year average — meaning the earnings recovery is already in the price. This means → the window for blanket European exposure is closing; financials and industrials are where she sees the remaining structural edge.
How strong was Europe's earnings season, really?
STOXX 600 constituents are expected to post 22.4% year-on-year earnings growth in Q2 — the strongest since Q3 2022.
MSCI Europe profits rose 14%, with over half of constituents beating expectations — both metrics at the highest level since early 2023.
This means → European corporate earnings are genuinely recovering. The question is not whether improvement happened, but whether the market has already priced it in.
Earnings revisions turned positive — is the gap with the US closing?
JPMorgan's strategy team notes that eurozone EPS revision data has turned fully positive, with the gap to US earnings growth nearing a complete close for the first time since early 2025.
Citi data shows Q2 European earnings estimates were revised up from 11% to 15%; Q3 growth expectations sit at 18%.
The recovery is broadening: energy leads at 135.8% growth, basic materials at 57.6%, and industrials delivered 16% EPS growth with 9% sales growth.
In plain terms = it is not one or two sectors propping things up — multiple industries are earning more at the same time. That kind of broad-based improvement is what gives valuations room to expand.
Valuations are no longer cheap — so why single out financials and industrials?
Faller is explicitly bullish on financials and industrials, citing a "more supportive economic environment" and their ownership of physical assets that are hard to replace and less exposed to AI disruption.
European banks are benefiting from multiple tailwinds at once: improving fundamentals, rising dividends and buybacks, and a full three months of elevated rates in Q2 keeping net interest margins — the spread between what banks earn on loans and pay on deposits — at favorable levels.
This means → Faller's thesis is not "European equities broadly can keep rallying." It is "only the sectors whose earnings growth is not yet fully priced deserve fresh capital."
Why are industrials riding the AI wave?
Faller highlights "capital-intensive, hard-to-replace assets" in the AI supply chain — from gas-turbine makers supplying data centers to power-equipment manufacturers.
In plain terms = no matter how much AI disrupts software, data centers still need electricity and physical buildings. European industrial firms making generators and transformers turn out to be the most certain beneficiaries of the AI boom.
Goldman Sachs data shows that July earnings forecasts were revised upward across nearly all sectors except basic resources and consumer discretionary, with tech and energy seeing the largest upgrades.
What is the biggest risk?
The US 30-year Treasury yield surged to 5.326% on August 18 — a post-2007 high — already triggering sharp volatility in Asian tech stocks.
This means → if US yields keep climbing, the valuation anchor for global risk assets shifts higher. European equities at 15x forward P/E sit nearly 20% above the 13x 20-year average — not much of a cushion.
A Bank of America survey shows a net 53% of fund managers expect European equities to rise over the next one to three months — sentiment is broadly optimistic. But with analysts aggressively raising forecasts, the earnings bar is already elevated; whether current valuations can hold once growth momentum slows is the key test ahead.
Content is for reference only, not financial advice.