Asset management giant BlackRock's fund manager Thomas Baker has stated that European stocks appear attractive following their recent pullback. He believes policymakers may leverage the current energy crisis to propel long-delayed fiscal investments. Despite a strong start to the year, European equities have significantly underperformed global peers since the outbreak of conflict in the Middle East in late February. Data shows the Euro Stoxx 50 has declined 3.8% since early March, while the S&P 500 and South Korea's KOSPI index have risen approximately 8% and 38%, respectively, over the same period. The reasons are twofold: Europe is more vulnerable than the U.S. to energy shocks stemming from the Middle East conflict and lacks the tailwind from artificial intelligence (AI) investments that is boosting U.S. and Asian stock markets. However, in Baker's view, this performance divergence creates an opportunity to adjust portfolios, allowing investors to buy undervalued eurozone stocks at lower prices that could benefit from fiscal stimulus. He noted that BlackRock recently began taking profits on its overweight positions in Asian semiconductor stocks, including those in Taiwan, China, South Korea, and Japan, and reallocating those proceeds to French equities. Baker described French stocks as "attractively valued." In an interview, he remarked: "If you look at the underperformance of the French CAC index over the past one and three years, it's quite significant. It's a very cyclical index that also includes some large energy producers, so we think it's somewhat approaching a bottom there—it's always darkest before the dawn." Baker's investment thesis for European equities is based on the expectation that policymakers will use the energy security crisis to drive productivity-enhancing investments. However, he also acknowledged that Europe faces structural challenges in AI development. He stated that Europe's electricity costs can be three times higher than in other regions, making the economics of data centers difficult.

Stronger-than-expected earnings have helped European stocks rebound swiftly from March lows, while a widespread belief among investors that Middle East tensions will gradually ease has also provided support. Despite Baker's positive outlook on European equities' attractiveness post-pullback, the robust earnings season masks potentially more severe challenges ahead for European markets. As the impact of the Middle East conflict persists, companies will find it increasingly difficult to meet high earnings expectations in the coming quarters. Data indicates that first-quarter earnings for the MSCI Europe Index grew 5.6% year-over-year, surpassing the previously expected 2.6%. However, the bar for future earnings surprises will be raised even higher.

Market expectations for European corporate earnings growth remain high and are still being revised upward. Current consensus forecasts predict an 11% increase in European corporate profits for 2026 and 10.2% for 2027. This implies that most of this year's earnings growth must be achieved over the next three quarters. If high oil prices weigh on the economy, this expectation appears overly optimistic. Meanwhile, the recent rebound in European equities has been highly concentrated, with only a handful of stocks contributing the majority of gains and earnings estimate revisions. The energy sector has led the advance, alongside some semiconductor, infrastructure, and AI beneficiary stocks such as ASML, Nokia, and industrial giant ABB. Roland Kaloyan, head of European equity strategy at Societe Generale in Paris, commented: "Overall, it was a decent quarter, and earnings momentum has been good so far this year. But if you exclude energy, mining, and semiconductor stocks, earnings revisions are actually negative." "We are more concerned about the second, third, and fourth quarters of this year. Market expectations are already much higher, and the negative impact of the war on supply chains, energy, or raw material costs is likely to gradually materialize in the future."

European corporate earnings expectations are rising, but a significant portion stems from substantial profit increases in the energy sector. Goldman Sachs strategists noted that since the outbreak of the conflict, earnings expectations for the energy industry have been revised upward by more than 50%, a situation reminiscent of the period following the Russia-Ukraine conflict four years ago. The strategists stated: "Similar to 2022, the current rise in overall earnings per share (EPS) expectations is primarily driven by the commodities sector. These industries carry high weightings in overall earnings, so their profit expectations are being significantly revised upward." However, while earnings growth from energy companies, due to their substantial weighting, provides a boost to the index, conditions in other sectors are less optimistic. Consumer-related industries—such as travel, automotive, and luxury—are facing pressure. Goldman Sachs strategists raised their 2026 EPS growth forecast for the pan-European Stoxx 600 from 5% to 10% but lowered their 2027 forecast from 7% to 5%, as they anticipate a pullback in energy sector profits next year.

This earnings season has seen some notable disappointments in the consumer discretionary sector. Both LVMH and Kering warned of weakening demand due to the Middle East conflict, while Hermès reported a rare sales decline. In contrast, industrial companies benefiting from infrastructure development, such as ABB, saw a surge in orders, while energy producers like Shell delivered results far exceeding expectations. As the market increasingly views the Middle East conflict as moving toward de-escalation, analysts may accelerate adjustments to earnings forecasts. In the short term, the pace of earnings estimate revisions may be what truly matters. A Citigroup earnings revision indicator for European markets outside the U.K. has recently begun moving into "upgrade territory." After remaining mostly negative for much of the past 15 months, the indicator has risen to its highest level since February of last year. UBS strategists noted: "While absolute earnings levels are important for long-term returns, changes in earnings expectations are often the key driver of short-term European equity performance. Earnings revisions become an important new source of information for investor reactions, and revisions tend to be continuous."

A key characteristic of European earnings growth is that its pace lags far behind that of the U.S. The year-over-year EPS growth for S&P 500 constituent companies is currently close to 27%, whereas market expectations before the earnings season began were only 12%. Large-cap technology stocks have been the core growth drivers, with the AI boom showing no signs of slowing. Additionally, the breadth of European companies' earnings "surprises" is narrower, with less than 50% of companies beating expectations and over 34% falling short. In contrast, more than 83% of U.S. companies have exceeded consensus earnings estimates. Only 49% of MSCI Europe Index constituent companies beat earnings expectations in the first quarter.

Barclays strategists continue to favor U.S. equities over European ones, citing the still-strong earnings momentum of U.S. companies. U.S. stock valuations have retreated, with technology stocks appearing among the most attractive in nearly a decade. In Europe, they observe that companies are more cautious about the future outlook, with a higher risk of earnings estimate downgrades. However, these strategists also believe there are potential positive catalysts on both sides of the Atlantic. The Barclays strategist team stated: "We believe that as Trump's approval ratings decline and with rising gasoline prices and mortgage rates ahead of the midterm elections, Trump is likely inclined to end the conflict as soon as possible. Meanwhile, as Germany's fiscal stimulus measures take effect, the EU could also benefit from a stronger domestic economic recovery in the second half of the year."