Yes. Europe’s sector mix is better positioned for today’s environment than it was during the low-growth, low-rate, underinvestment regime of the prior decade. Higher interest rates and stronger public and private investment in defense, infrastructure, energy security, and electrification favor Europe’s exposure to financials, industrials, utilities, and technology hardware. As European earnings growth normalizes relative to the United States, improving fundamentals should support the euro and European equities, reinforcing our overweight to global ex US equities versus US equities.
For much of the 2010s, fiscal austerity and private sector deleveraging led to subdued investment that constrained business activity in several of Europe’s largest sectors. Banks were rebuilding balance sheets after the financial and sovereign debt crises, while low rates limited their earnings potential. Weak capital spending offered fewer opportunities for industrial companies and utilities. Today, stronger bank balance sheets and a larger pipeline of projects present a different backdrop. Governments and companies are investing to renew aging infrastructure, strengthen energy security, expand defense capacity, and meet rising electricity demand.
The earnings recovery is already underway. After contracting from 2009 through 2021, the MSCI Europe Index earnings per share (EPS) has grown 8% annually on average since 2021. Improved margins have lifted return on equity (ROE) to 15%, versus a 10% average from 2009 through 2021, without greater leverage. Financials and industrials have driven the rebound, with EPS in both sectors growing by an average of 11% annually since 2021. Estimates for 2026 EPS growth have risen by more than 8 percentage points since the start of the year, to 21%. Supply-chain disruptions stemming from the Iran War have boosted commodity-related sector earnings, contributing meaningfully to the improved 2026 EPS outlook. Even so, most sectors are projected to grow earnings above 5% this year.
Financials remain central to that outlook. European banks enter this period with stronger capital positions and fewer nonperforming loans than in the post-crisis years. Higher rates support net interest income (NII), while investment-led borrowing boosts loan growth. Since 2021, NII for major European banks has risen by more than 40%, and loan growth is up 10%. Industrials and utilities both stand to benefit from greater domestic investment across Europe. Industrials supply defense, transport, automation, and data center projects, while utilities are positioned to invest in the grids needed for greater electricity use. At the end of September, estimated 12-month forward earnings growth for the MSCI Europe Index was 13%, with financials at 15%, industrials at 12%, and utilities at 8%—all well above these sectors’ 20-year medians.
While the United States has been at the center of the AI-investment cycle, Europe has also benefited. Major European technology companies, such as ASML and Siemens, provide semiconductor equipment, electrical components, automation, and the infrastructure needed to build and power data centers, positioning Europe as a key supplier to global AI investment. Still, IT accounts for about 10% of MSCI Europe’s market capitalization, compared with about 33% of the MSCI All Country World Index. The smaller weight has contributed to Europe’s underperformance in recent years but should also limit its exposure to a reversal in technology valuations. A sharp pullback in planned capital spending or data center construction would, however, still weigh on suppliers.
Risks to the recovery in European earnings remain. Elevated energy prices raise costs across a net energy-importing economy and could weigh on demand and margins if they persist. So far, the economy has absorbed the shock without broad deterioration. Only 45% of MSCI Europe revenues are generated in Europe, limiting dependence on domestic growth, though elevated shipping costs and intensifying competition from China could pressure exporters.
Political instability poses another risk. Higher sovereign borrowing costs could raise bank and corporate financing costs and deter investment, particularly if credit quality weakens. Rising French OAT yields reflect fiscal uncertainty and upcoming election risk, but stronger euro area bank balance sheets, institutional safeguards established after the 2010–12 crisis, and the absence of broader credit market stress point to a repricing of France-specific risk rather than broader contagion.
Despite these risks, we believe higher interest rates, increased investment, and Europe’s favorable sector mix will continue to support European earnings. Stronger bank balance sheets should turn financials from a longstanding drag into an earnings driver, while investment in defense, infrastructure, energy security, and electrification should benefit industrials and utilities. These improving fundamentals reinforce our preference for global ex US equities over US equities over a three- to five-year horizon.
Graham Landrith, Associate Investment Director, Investment Strategy Research