Can Lower Oil Prices and Fiscal Support Extend Europe’s Equity Rally?

European equities have outpaced their global peers in recent months, and Citi strategists believe the region could become increasingly attractive as a long-term component of global portfolios. However, the bank continues to maintain a Neutral stance on European stocks for now.

The Euro Stoxx 50 has gained 8% over the past three months, compared with a 5% advance for the S&P 500, with European large-cap companies leading the rally. Within the MSCI Europe, cyclical sectors have generally outperformed defensive areas, while Finance, Healthcare, IT and Industrials have also delivered strong performances.

Citi sees three main factors that could sustain the momentum: an improving and resilient macroeconomic and earnings backdrop, continued fiscal support and Europe’s growing potential to act as a hedge against volatility surrounding artificial intelligence.

Economic and Earnings Momentum Improves

European economic surprise indicators have “improved significantly” in recent months after repeatedly falling short of expectations following the outbreak of the US-Iran conflict, according to strategists led by Beata Manthey.

The improvement has also extended to corporate earnings expectations. Citi’s European earnings revision index has moved higher, contrasting with the usual seasonal pattern of weakening ahead of earnings season.

The strategists said “revisions were unusually wide, with a large majority of European subsectors posting upward revisions to net EPS.”

This combination of improving economic data and broader upward earnings revisions provides a more supportive fundamental backdrop for European equities.

Fiscal Policy Turns Into a Growth Driver

Fiscal policy is also becoming more supportive for the eurozone economy after acting as a drag on growth last year.

Citi economists estimate that government spending and fiscal measures could add around 30 basis points to eurozone GDP growth in 2026, following a negative contribution in 2025.

Germany is expected to play a particularly important role. Its budget deficit is forecast to increase from approximately 2.7% of GDP in 2025 to around 4.0% this year as fiscal policy becomes more expansionary.

At the European level, the EU’s proposed seven-year, $2 trillion long-term budget is also approaching its final stages, potentially providing another source of investment and economic support.

Europe Emerges as a Potential AI Diversifier

Europe’s relatively limited exposure to technology compared with other major equity markets could also become an advantage during periods of uncertainty surrounding artificial intelligence.

Citi said the region has been “tending to outperform when sentiment around AI wavers,” suggesting that European stocks can provide diversification when enthusiasm for technology and AI-related companies weakens.

As a result, the strategists believe that “Europe could play an increasingly important role as an AI diversifier in global portfolios.”

This characteristic could become more relevant as AI-related stocks account for an increasingly large share of valuations and performance in other major global equity indices.

Citi Sees Around 8% Upside by Mid-2027

Citi is targeting approximately 8% upside for European equities through mid-2027, although it continues to rate the region Neutral within its global asset allocation framework.

Geopolitical risks remain an important constraint. In particular, renewed increases in oil prices and interest rates could undermine economic growth and corporate earnings, even as investor positioning towards European equities has become more constructive.

Lower oil prices would therefore provide an additional potential tailwind by easing inflationary pressure and reducing costs for energy-importing European economies.

Citi Highlights European Stock Opportunities

Within the region, Citi is screening for companies combining positive EPS momentum, attractive relative valuations, net negative concentration scores and Buy or Neutral ratings from its analysts.

Stocks identified through these criteria include Adyen (EU:ADYEN), LVMH (EU:MC), Novo Nordisk (TG:NOV), Diageo (LSE:DGE) and London Stock Exchange Group (LSE:LSEG), among others.

The combination of improving earnings expectations, greater fiscal support and diversification away from AI-heavy global indices could strengthen the longer-term investment case for Europe, even as Citi remains tactically Neutral on the region.

This article was written by the editorial team at InvestorsHub/ADVFN and is provided for informational purposes only. In some cases, editorial staff may use artificial intelligence–based tools to assist in the research, drafting, or editing of content, under human review and oversight. This article does not constitute investment advice, a recommendation, or an offer to buy or sell any securities. The views expressed are based on publicly available information believed to be reliable at the time of publication, but accuracy or completeness is not guaranteed. Readers should conduct their own independent research and consult a qualified financial professional before making any investment decisions.