Deutsche Bank took a bullish stance on European equities. Why did it change its opinion?

Deutsche Bank has improved its forecast on European shares and advised to buy - after having given up such a recommendation in summer. According to the bank's analysts, the 15-year gap between European stock markets and the US is coming to an end. The main reasons for Deutsche Bank's improvement are lower valuations amid overheated U.S. securities, diversification and strong fiscal momentum. Since the beginning of the year, the pan-European Stoxx 600 index is up nearly 13%.

Deutsche Bank upgraded its recommendation on European equities from "neutral" to "positive", CNBC reports. It expects them to rise through the end of the year and forecasts the Stoxx 600 to add 12% in 2026 and the region's major indices to gain up to 16% - thanks to a combination of more attractive valuations, greater market diversification and strong fiscal momentum.

"We believe we are at a breaking point after a 15-year period of structural outperformance of U.S. equities over European equities. Changes in valuations, leverage, market concentration and even risk profiles are setting the stage for a revival of interest in European securities," the bank's analysts said.

Amid record highs for the US S&P 500 and Nasdaq Composite, raising fears of a bubble bursting in the AI sector, investors are looking for opportunities outside the US, says CNBC, and Europe looks particularly attractive. "Among all regions of the world, this market is the only one where current valuations remain moderate compared to historical levels," Deutsche Bank said.

In July, it downgraded European equities from "buy" to "neutral" amid global trade tensions.

The main contribution to the growth of the Stoxx 600 will be made by the automotive industry, energy and materials sector, analysts predict. They also note moderate valuations of companies with small and medium capitalization.

Deutsche Bank is particularly optimistic about the German market. After the approval of the budget for 2025, the country's spending is accelerating, supporting industry. Germany plans to spend billions on defense, with most of the contracts going to European manufacturers. "Placing orders, especially in the defense sector, is already stimulating demand and supporting the market, even if the actual spending will take place later," the bank notes.

In France, political instability may create short-term uncertainty, but in the longer term, French equities are more influenced by global economic factors. Deutsche Bank's forecast for the growth of the French CAC 40 index is 14% by the end of 2026. From the German DAX analysts expect - 16%.

Deutsche Bank expects continued growth of the U.S. market due to strong economic indicators, which exceeded analysts' expectations. At the same time, the bank warned of possible risks associated with the high debt burden of companies and the state, which may limit further growth. In addition, concentration risks are higher: the largest companies in the S&P 500 account for a third of the index's weight, while the Stoxx 600 has only 14%. Excluding the seven leaders of the S&P 500, the Stoxx 600 would have shown higher returns over the past five years, Deutsche calculates.

UBS also sees potential in European markets, CNBC notes. According to Garry Fowler, head of the U.S. and European equity and derivatives strategy team, the region's weakness is centered in net exports, which means there is upside potential in domestic markets less exposed to trade and currency fluctuations. UBS predicts the Stoxx 600 could have an annualized return of around 10%, "something Europe hasn't seen in a long time."

This article was AI-translated and verified by a human editor