European stock markets are gaining fresh fundamental support.

Following nearly two years of persistent downward revisions, the outlook for European corporate earnings is showing significant improvement. According to a profit revision indicator tracked by Citigroup, analysts have raised profit forecasts for European companies more often than they have cut them for ten consecutive weeks, marking the longest stretch of net upward revisions in nearly two years. Concurrently, Bloomberg Intelligence anticipates that European corporate profits will grow 12% year-on-year in the second quarter, which would be the fastest pace in over three years.

This improved earnings outlook is prompting institutions to further raise their targets. Morgan Stanley has increased its 2026 earnings growth forecast for the MSCI Europe Index to 12.5% and expects the index to have approximately 10% upside over the next 12 months. Fund flows are also showing signs of recovery. For the week ending July 8, European equity funds recorded net inflows of around $400 million, indicating renewed global interest in European assets.

Ten-Week Streak of Upward Revisions Raises Questions on Sustainability

After nearly two years of almost uninterrupted downgrades, the direction of revisions to European corporate profit expectations has undergone a material reversal. Data from Citigroup, based on Bloomberg statistics, shows that European earnings expectations have seen net upward revisions for ten straight weeks, the longest such streak since mid-2024.

However, Bloomberg also cautions that a similar period of upgrades two years ago came to an abrupt halt just weeks before the earnings season began, quickly turning into downgrades. This precedent has cast doubt on the sustainability of the current trend.

More critically, the expectations themselves are becoming a source of risk. Market pricing for earnings growth is already at elevated levels, meaning any shortfall in actual reported results could amplify pressure for stock price corrections. From a sector perspective, the energy sector is expected to find support for profits from relatively high oil prices, while the banking sector is seen as an early beneficiary of the AI adoption wave in Europe, with its earnings resilience likely to persist.

Marina Zavolock, a fund manager at asset manager Natalia Milovets, believes the market is systematically misjudging European corporate profits. "The inflationary environment, AI penetration, and global revenue diversification are collectively forming a structural support for European corporate earnings," she stated. "These factors are not yet fully priced in, leaving room for further upside in European equities."

In terms of market performance, after lagging behind U.S. stocks since March, the Europe Stoxx 600 Index outperformed the S&P 500 last month. One catalyst was a temporary U.S.-Iran peace deal that briefly eased geopolitical risk premiums. Although geopolitical risks have recently intensified again, current oil prices remain significantly lower than during the peak of the conflict.

Helen Jewell, Chief Investment Officer for International Fundamental Equities at BlackRock, noted, "Europe is currently better positioned as a diversification tool within a portfolio. AI-themed holdings are highly concentrated, and the sector breadth of the European market can effectively hedge against such crowding risks. From the perspective of earnings trends and corporate resilience, Europe is not at a disadvantage."