Europe's Resilience Re-Rate

European equities are positioned for a gradual resilience re-rate because earnings have held up through an energy and geopolitical shock while the region remains unusually cheap.

• Eurozone equities have broadly matched US and global markets year to date; UK equities gained 13.4% versus 12.2% for the MSCI EMU Index, while Russian gas fell from roughly 40% of EU imports in 2021 to 6% and storage entered the conflict at 63% versus 30% in 2022.
• The ECB raised its three key rates by 25 basis points to a 2.50% deposit rate, while its projections put headline inflation at 3.0% in 2026 and 2.5% in 2027; the response remained gradual and offered no rate-path commitment.
• FY2026 EPS expectations for the MSCI Europe Index rose about 5% year to date, implying 12.5% growth versus 2025, although this remains below MSCI ACWI's 14.2% because Europe has less exposure to AI and mega-cap technology.
• European equities trade at 17.6 times trailing earnings, versus 22.3 times for MSCI ACWI and 25.4 times for the S&P 500; the authors argue this discount can compensate investors if earnings prove more durable than expected.
• Announced M&A involving listed European companies by 30 October had already exceeded every full-year total since 2007, including Intesa Sanpaolo's US$35.3 billion bid for Monte dei Paschi and Prologis' agreed £14 billion acquisition of SEGRO at a 39% premium.
• Fiscal support is building through Germany's €500 billion infrastructure fund and EU competitiveness reforms, but implementation is slow: only €24 billion had been committed by the end of 2025, against an implied pace of roughly €40 billion annually.

Takeaway: Investors do not need Europe to deliver US-style growth; a sustained earnings base, improving fiscal support and recognition that the valuation discount is excessive could drive a gradual re-rating, although higher rates and weak delivery of public investment remain risks.