What factors are supportive of European stocks?

“Eurozone earnings for 2025 have seen persistent downgrades over the last year. But projections for next year are much higher, at nearly 15%, on a combination of easy base effects, an improving macro backdrop, rising liquidity, a better China outlook and fiscal stimulus,” Matejka noted.

For starters, the European Central Bank’s (ECB) accommodative monetary policy is expected to support credit growth and money supply in the region, thereby boosting activity and driving earnings higher. In addition, any pickup in consumer confidence should further bolster profitability.

Plus, increased fiscal spending in Germany — which was to some extent delayed due to the late passage of the 2025 budget — should finally kick in and support European growth and earnings going forward. “After the initial excitement over the German stimulus at the start of the year, investors were quick to fade the trade. We note that J.P. Morgan Global Research’s basket of German plays, excluding defense names, has unwound all of its year-to-date gains relative to the broader market,” Matejka said. “However, with government spending expected to pick up, we expect these names to start performing better once again.”

Finally, China’s improving domestic outlook could spell good news for European stocks. “European earnings and activity tend to be leveraged to China. As such, the encouraging policy developments in China, along with rising liquidity and the positive wealth effect, should support European luxury names,” Matejka added. 

Granolas stocks: Time to take a bite?

At the top end of the market, the Granolas — an acronym for 11 of the largest European companies, including GSK, Roche and ASML — have gone stale, underperforming meaningfully versus the broader index by 25% since early 2024. “The Granolas’ share of European market cap has decreased from 27% at the peak early last year, to 20% currently,” Matejka observed.

However, their prospects now look sweeter. “In contrast to their price underperformance, the earnings of the Granolas have not been all that weak. In fact, they are higher currently than at their price relative peak. Last year, the Granolas earnings grew broadly in line with their market, and this year they are at 8% EPS growth, while European earnings overall are largely flattish,” Matejka said. At the same time, Granolas’ cash on balance sheets has increased from €91 billion in 2023 to €106 billion in 2024, and their buybacks have materially increased from €23 billion in 2023 to €36 billion annualized in 2025.

“From the top-down perspective, we think that the Granolas’ risk-reward profile is looking better, post the period of underperformance,” Matejka added.