LIVE MARKETS-The case for Europe in global portfolios is getting stronger
SPY•Europe's case in global portfolios is improving
European shares have been beneficiaries of the broadening rally in global stocks this year, with improving macro, strong earnings and fiscal support helping them outperform many peers.
The large-cap EuroSTOXX50 .STOXX50E index is up about 8% in the last three months, beating the S&P 500's roughly 5% gain, while cyclical sectors have generally led the market higher.
Citi strategists, including Beata Manthey, say the backdrop remains supportive even though valuations are no longer especially cheap and geopolitical risks persist.
The U.S. bank points to a sharp improvement in European economic surprise indicators and a broad-based recovery in earnings revisions, trends that have historically led to stronger relative equity performance.
Fiscal support and AI diversification are seen as tailwinds
Fiscal policy is another tailwind. Citi economists estimate fiscal measures will add around 30 basis points to euro zone GDP growth this year, after being a net drag on growth in 2025.
The strategists also argue that Europe is becoming an increasingly useful portfolio diversifier as investors look beyond the AI trade. While some European companies benefit from AI spending, the region's relatively low technology weighting means it can outperform when AI sentiment wobbles.
"Longer-term, we note that the case for holding Europe in global portfolios may be improving, given idiosyncratic tailwinds from fiscal support and Europe's emerging role as a AI diversifier and beneficiary of AI adoption," they write.
All in all, Citi remains neutral on European equities globally because of geopolitical risk, but sees the region as a likely beneficiary of further market broadening.
