European equity markets continue to trade near record highs despite recent geopolitical uncertainty linked to tensions involving Iran. In a recent research note, JPMorgan reiterated its positive outlook for the region, arguing that corporate earnings are beginning to recover after several years of relatively muted growth.
The bank’s analysts also said they do not expect inflation expectations to become unanchored, a scenario that could allow the European Central Bank (ECB) to adopt a less aggressive approach to future interest rate increases than financial markets currently anticipate.
Improving Fundamentals Support the Investment Case
JPMorgan believes several factors continue to support European equities. Analysts pointed to strengthening corporate earnings, valuations that remain below those of comparable U.S. companies and generally higher returns to shareholders through dividends and share buybacks.
The bank also highlighted a more supportive regulatory environment, which it believes is encouraging a recovery in mergers and acquisitions (M&A) activity following the slowdown experienced in 2023.
“Eurozone PMIs, credit growth, and earnings revisions are all trending positive, with the CESI hitting a two-year high. After outperforming the US last year, accounting for 7% of total return in local currency terms, eurozone equities are slightly ahead again this year, up 12% versus 9%, respectively,” JPMorgan said.
Rotation Beyond Artificial Intelligence
Although the bank believes the recent market rotation away from high-momentum stocks is becoming more mature, it continues to favour portfolio diversification during the second half of the year.
According to JPMorgan, artificial intelligence is likely to remain an important investment theme, but investors may increasingly find opportunities in other sectors as market leadership broadens.
Shareholder Activism and M&A Activity Could Increase
The investment bank also expects shareholder activism to become more prominent across Europe, arguing that many listed companies continue to trade below their intrinsic value despite generating resilient cash flows.
Analysts believe European companies often possess identifiable opportunities to improve governance, capital allocation or operational performance without facing significant financial distress.
Industrial companies, consumer discretionary businesses and technology firms remain the sectors most frequently targeted by activist investors, while campaign activity is particularly strong in the UK, Germany and France.
JPMorgan also noted that proposed revisions to the Shareholder Rights Directive III (SRD III) could help accelerate shareholder activism by creating a more supportive regulatory framework.
Undervalued Companies Continue to Attract Buyers
The bank observed that activist investors are increasingly focused on capital allocation rather than corporate strategy, encouraging companies to increase shareholder returns through share buybacks and dividend distributions.
JPMorgan also pointed out that a relatively high proportion of listed companies in the UK, France and Germany continue to trade below book value compared with U.S. peers. Combined with the ongoing recovery in global M&A activity, this creates an attractive environment for corporate acquisitions as businesses seek greater scale and international competitiveness.
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