As rising U.S. Treasury yields put pressure on the global AI-driven stock rally, JPMorgan's global investment strategist Madison Faller has issued a fresh asset allocation signal: while the U.S. remains the "core of the portfolio," European markets are entering a phase that demands a "selective approach," with financial and industrial sectors emerging as the most attractive value opportunities in her view.
Faller's latest remarks highlight a critical shift unfolding in European markets: European corporate earnings growth is catching up with the U.S., yet the market has not fully priced in the structural opportunities behind this trend. Against the backdrop of Europe's strongest second-quarter earnings season in three years, the divergence across sectors is creating new investment windows.
Europe's Earnings 'Catch-Up' to the U.S.: A Three-Year Best Earnings Season Reshapes the Market Narrative
European companies have just wrapped up a landmark earnings season. According to LSEG I/B/E/S data, STOXX 600 constituents' second-quarter earnings are expected to grow 22.4% year-over-year, marking the strongest pace since the third quarter of 2022. Data shows MSCI Europe index profits rose 14%, with more than half of constituents beating expectations—both metrics at their highest levels since early 2023.
The drivers behind this earnings rebound exhibit clear structural characteristics: the energy sector leads with 135.8% growth, while basic materials (including chemicals, steel, and mining) grew 57.6%. But what deserves more attention is the broadening of growth momentum—from raw materials, industrials, to technology, the entire AI and infrastructure supply chain is seeing rapid growth, with the financial sector providing an additional boost.
Earnings revision trends are also sending positive signals. JPMorgan's strategist team points out that eurozone earnings-per-share revisions have been rising steadily over the past few weeks and have turned fully positive, with the gap to U.S. earnings growth narrowing and approaching a complete closure for the first time since early 2025. Citi data shows second-quarter European earnings expectations have been revised up from 11% to 15%, with third-quarter growth expectations at 18%.
From 'Broad Allocation' to 'Selective Picking': Faller's New European Investment Framework
Against this backdrop, Faller has laid out a clear European investment framework. She notes: "Over the past few quarters, we have indeed seen improvements in European equity earnings. I think valuations have kept pace with this trend, so the key is where you should focus your exposure in Europe."
Faller's core strategy logic encompasses several layers: the U.S. remains the "ballast"; given U.S. economic growth and innovation potential, economic resilience, and higher corporate profit margins, the U.S. "remains the core of the portfolio." Europe shifts to "selective allocation"; "For Europe, we will adopt a more selective investment strategy toward the sectors we favor." Financials and industrials are priority options. Faller clearly favors the financial and industrial sectors, believing these will benefit from a more favorable economic environment. She also specifically mentions companies with hard-to-replace physical assets that are less vulnerable to AI disruption.
On seizing AI investment opportunities, Faller similarly emphasizes a "full supply chain" perspective. She points out that investors should not only focus on tech giants but should look across the entire AI supply chain—"The AI story is not confined to a single industry; what we are really focused on are those capital-intensive and hard-to-replace assets," she specifically cites semiconductors, infrastructure, utilities, and industrials.
Catalysts for Financials and Industrials: Fundamental Improvements and AI Infrastructure Dividends
Faller's optimism toward financials and industrials is built on solid fundamental improvements. European banks are experiencing a confluence of multiple positive factors. Faller notes that given improving fundamentals in the European banking sector, along with rising dividends and share buybacks, regional bank stocks deserve attention. JPMorgan's strategy team further points out that banking is expected to be a key contributor to second-quarter earnings and is likely to deliver upside surprises. Productivity gains from applied AI help control costs, while first-quarter loan loss provisions are unlikely to repeat—as shocks like the Market Financial Solutions collapse are more idiosyncratic events than systemic risks. European banks are expected to benefit from a full three months of elevated interest rate environment in the second quarter, with net interest margins maintained at favorable levels. Share buybacks and dividend growth provide additional valuation support.
The industrial sector stands at the structural inflection point of AI infrastructure buildout. Faller explicitly mentions that "capital-intensive and hard-to-replace assets" in the AI supply chain are the focus of her attention. From gas turbine manufacturers indispensable to data center construction (such as Siemens Energy), to electrical equipment suppliers (such as Schneider Electric), the expansion of the entire AI infrastructure chain is creating sustained incremental demand for European industrials.
In terms of sector performance, the STOXX 600 industrial sector achieved 16% EPS growth and 9% sales growth in the second quarter. FactSet data shows that industrial, energy, and materials sectors have seen the strongest positive market reactions to earnings beats.
Market Sentiment and Risk Warnings
A recent Bank of America survey shows a net 53% of fund managers expect European stocks to rise over the next one to three months, reflecting broad market confidence in Europe's earnings recovery. However, risks cannot be ignored. On August 18, the U.S. 30-year Treasury yield surged to 5.326%, the highest since 2007, triggering sharp volatility in Asian tech stocks. If U.S. Treasury yields continue to climb, they could exert systemic pressure on global risk asset valuations. Additionally, analysts'密集 upward revisions to earnings expectations have raised the bar for European performance—current valuations have climbed to a forward P/E of approximately 15 times, above the 20-year average of 13 times.
Conclusion
JPMorgan strategist Faller's latest remarks provide a clear framework for European asset allocation: the U.S. remains the core, Europe requires selective picking, and financials and industrials are the most attractive sectors at present. Against the backdrop of European companies delivering their strongest earnings performance in three years and continuously improving earnings revision trends, this strategic logic is being validated by the market. Goldman Sachs data shows that except for basic resources and non-essential consumer goods, earnings forecasts for all other industries were revised up in July, with technology and energy seeing the largest upward adjustments. As Faller puts it, the AI story does not belong solely to a single industry—those sectors with hard-to-replace physical assets, capital intensity, and exposure to AI infrastructure expansion are becoming the core battleground for European markets in the next phase.