European equity markets have reached record highs even as tensions in the Iran conflict have intermittently resurfaced. In a recent research note, JPMorgan outlined a broadly constructive view on the region's equities, arguing that corporate earnings are finally firming following three years of subdued performance.
The bank's analysts say they do not expect inflation expectations to become unmoored - a development that could make it easier for the European Central Bank to pursue smaller rate hikes than markets currently anticipate.
JPMorgan lists several reasons it believes now is an attractive entry point for investors in Europe. First, the firm points to improving earnings trends across the region. Second, European stocks generally trade at a discount to their American counterparts. Third, companies listed in Europe are, in JPMorgan's view, delivering higher returns to shareholders.
The note also highlights a shifting regulatory and corporate landscape that is boosting M&A activity. Deal volumes have been climbing since hitting a low in 2023, a trend JPMorgan views as likely to continue as strategic consolidation and scale-seeking transactions gain momentum.
"Eurozone PMI, credit growth and earnings revisions are all on the uptrend, with CESI hitting a 2-year high. After an outperformance vs the US last year, of 7% in LC terms, total return, Eurozone equities are just about ahead again this year, at 12% vs 9%, respectively," JPMorgan stated.
Alongside the macro and earnings improvement, JPMorgan's team sees the recent momentum unwind as reaching a level of maturity and continues to recommend portfolio rotation and broader participation into the second half of the year. The analysts add that artificial intelligence probably will not be the only investment theme driving returns.
Another focal point for the bank is the prospect of rising shareholder activism in Europe. JPMorgan argues many firms in the region are undervalued but possess identifiable levers to improve governance, capital allocation, or operations. Those companies typically are not under financial distress and often generate resilient cash flows, yet they trade at a persistent valuation discount versus U.S. peers.
- The sectors most frequently targeted by activists, according to JPMorgan, include Industrials, Consumer Discretionary and Technology.
- Campaign activity is concentrated in the U.K., Germany and France.
- A proposed SRD III revision could act as a catalyst to accelerate activism by reducing regulatory fragmentation.
JPMorgan notes a shift in activist agendas. Where Business Strategy used to top the list of objectives, capital allocation has become the primary focus. That change has coincided with an uptick in demands for shareholder returns, including share buybacks and dividend hikes, which are increasingly common outcomes of activist campaigns.
The bank highlights that markets in the U.K., France and Germany contain a higher share of stocks trading below book value than peers in the U.S., making them natural targets for M&A given global dealmaking momentum and a desire among acquirers to scale and improve global relevance.
Overall, JPMorgan's note synthesizes improving macro indicators, earnings momentum, attractive relative valuations and a regulatory environment that may soon favor more active shareholder engagement as reasons to favor European equities at current levels.