European equities are increasingly winning over investors who once viewed the region as little more than a cheap alternative to US markets.
A combination of stronger corporate earnings, improving economic data and rising investor confidence is now giving the rally a more fundamental foundation.
The shift has been visible in the market itself.
The Stoxx Europe 600 rose on every trading day last week, marking its longest winning run since June and adding to gains that have pushed the benchmark up about 11% so far in 2026.
Helen Jewell, international chief investment officer for fundamental equities at BlackRock, said enthusiasm for Europe has clearly increased as the region continues to outperform expectations.
Stronger Earnings Change the Investment Case
For years, European stocks were often pitched to investors primarily on valuation.
Shares were significantly cheaper than their US counterparts, giving international investors an apparent bargain.
That argument is now being strengthened by improving corporate performance.
European companies are recording their strongest earnings growth in roughly four years, with profits expanding by 17%.
At the same time, economic momentum has reached its highest level since March 2023.
Those developments are encouraging investors to look beyond Europe’s historically low valuations and focus more closely on the possibility of sustained earnings growth.
Mark Haefele, chief investment officer at UBS Global Wealth Management, said the balance of risks currently favors companies exceeding quarterly earnings expectations and suggested investors reassess their exposure to European shares.
Fund Managers Are Turning More Bullish
Investor positioning provides another indication that attitudes toward the region are changing.
A recent Bank of America survey found that a net 2% of fund managers were overweight European equities.
That represents a notable change from June, when 15% were underweight.
Research from Citigroup also showed Europe recording the strongest improvement in risk appetite among major regions during the final week of July.
That renewed interest could help European benchmarks maintain their momentum during the second half of the year.
Germany’s DAX, France’s CAC 40 and Italy’s FTSE MIB have all reached record levels.
Rally Broadens Beyond a Handful of Stocks
Another encouraging feature for investors is the breadth of the advance.
Roughly three-quarters of the companies in the Stoxx 600 are currently trading above their 200-day moving averages.
That puts the breadth of the rally close to the strongest levels seen over the past decade.
The improvement in geopolitical sentiment has also played a role.
Signs that tensions between Washington and Tehran could ease have reduced some of the pressure that had weighed on European markets.
Oil prices have also fallen from their July highs, helping to reduce concerns about another inflationary shock.
However, uncertainty remains over whether the Strait of Hormuz will fully return to normal.
Beata Manthey, Citigroup’s head of European equity strategy, said geopolitical concerns had previously restricted investor appetite for European shares and that a further improvement could unlock additional demand.
AI Is Creating a New Opportunity for Europe
Artificial intelligence is also helping reshape the investment case for European equities.
The first phase of the AI-driven market boom largely rewarded companies pouring huge amounts of money into computing infrastructure and related technology.
Investors are now increasingly looking for businesses that can benefit from that spending or improve their profitability by adopting AI themselves.
European semiconductor companies have been major beneficiaries.
ASML Holding and Infineon Technologies have both gained more than 60% in 2026, making them important contributors to the Stoxx 600’s advance.
A Bank of America basket tracking European companies adopting AI has also climbed 14% this year.
The group includes industrial giant ABB, Standard Chartered and energy company E.On.
Banks and Industrials Offer a Tech Alternative
The changing AI trade has also created opportunities for sectors outside traditional technology.
European banks and industrial companies are attracting investors who want exposure to economic growth without being completely dependent on the volatile AI trade.
The Stoxx 600 Banks index, for example, has gained around 22% this year.
Manthey said investors are unlikely to abandon technology completely, even if AI-related shares regain momentum.
Instead, she expects investors to combine technology holdings with cyclical industries as a way of spreading risk.
That diversification could further benefit European markets because the region has a large concentration of banks, industrial companies and other economically sensitive businesses.
Europe Is No Longer Deeply Discounted
The rally, however, has changed one of Europe’s biggest attractions.
The Stoxx 600 now trades at about 15 times expected earnings.
That leaves it at its smallest valuation discount to the S&P 500 in four years.
For some investors, that raises the question of how much of Europe’s potential improvement is already reflected in share prices.
There are also risks that could interrupt the rally.
Ariane Hayate, a fund manager at Edmond de Rothschild Asset Management, warned that Federal Reserve rate increases could disrupt the current trajectory of European equities.
Even so, Hayate believes the broader direction remains favorable.
Skepticism Could Fuel Further Gains
Some investors argue that the lingering skepticism surrounding European stocks may actually provide additional support for the rally.
Daniel Murray, deputy chief investment officer at EFG Asset Management, believes expectations for Europe’s economic and earnings performance had previously become too pessimistic.
The market is therefore entering the latest phase of the rally from a relatively cautious positioning base, while sentiment is simultaneously improving.
That combination could prove powerful. If corporate earnings continue to outperform, economic growth remains firm and geopolitical risks continue to fade, Europe’s stock market may have something more substantial behind it than another short-lived rotation away from the US.
For now, investors appear increasingly willing to bet that Europe’s resurgence is becoming a longer-term story rather than simply the latest market trade.
