European stocks beat S&P 500 as Goldman lifts EPS forecast 15%

European stocks have outpaced the S&P 500 since early 2025, and Goldman Sachs lifted its STOXX 600 earnings forecast to 15 percent growth for 2026. The upgrade follows a first-half earnings season that delivered 14 percent year-on-year EPS growth, the strongest in three years, Goldman Sachs strategists said in an Aug. 11 report.

Even stripping out commodities, STOXX 600 earnings rose about 7 percent, with median company growth near the same level, pointing to broad-based gains rather than commodity-driven strength. European bank stocks have outpaced the Magnificent 7 in cumulative total returns since 2022, and the region is drawing its strongest net foreign inflows in a decade outside 2021.

The rotation reflects growing doubts about hyperscaler AI capital spending, which US markets increasingly fund through debt and equity issuance, while Europe's cash-generating, lower-tech structure offers a hedge. Political risk looms, with elections in France, Italy and Spain in 2027.

The profit recovery spans sectors. Financials, long a drag on European returns, have reversed course as higher rates and post-crisis capital rebuilding pressures eased, lifting regional return on equity. Defense spending, infrastructure, electrification and data-center buildout give the STOXX 600 exposure to themes that support margins. Goldman framed the cycle as "post-modern" — high rates, high inflation and accelerated infrastructure and energy-security investment favor the heavy-asset, low-obsolescence companies that dominate European indices. Energy-price gains, historically a headwind for the economy, correlate positively with European EPS because energy and basic-resources carry heavy index weight, while utilities, chemicals and financials pass through costs.

Foreign investors are driving the inflows, seeking to cut exposure to the dollar and concentrated US positioning. Corporate buybacks in banks and energy are expanding, and merger activity has accelerated, supporting mid-caps. The key gap versus the US: Europe lacks the retail bid that underpins American and Asian inflows. Goldman concedes Europe's valuation discount is partly justified — regulators and tax policy historically weigh on earnings persistence — but argues the gap exceeds what fundamentals explain. The UK's FTSE 350 trades at a deeper discount, and foreign takeover interest supports a re-rating case.

Europe trails on AI — data-center construction lags and frontier-model investment is thin — but that lag proved a shield during the "DeepSeek moment," when Nvidia fell 27 percent in a day, the Magnificent 7 dropped 16 percent and the S&P 500 lost 8 percent while European stocks posted positive returns. European free-cash-flow yields exceed bond yields and beat the US, and the region faces none of the financing pressure now funding US AI capex.

This article is for informational purposes only and does not constitute investment advice.