HSBC has raised its target for the Euro Stoxx 600 index, signaling further upside for European equities, underpinned by corporate earnings growth, valuation rerating, and improving economic expectations in the region.

The bank lifted its end-2026 target for the Euro Stoxx 600 from 670 points to 680 points, implying roughly 7% upside from current levels, marking its first upward revision of the index forecast this year. Looking further out, HSBC projects the index could climb to 760 points by the end of 2027, corresponding to a potential gain of approximately 20%.

Earnings growth and valuation rerating serve as key pillars

HSBC attributed the revised targets to a reassessment of corporate earnings per share growth, business confidence, and GDP forecasts across the region. The bank noted that further gains in European stocks cannot rely solely on valuation expansion, as corporate earnings must improve in tandem. If economic recovery continues to firm, lifting revenue and profit growth, and investors are willing to assign higher multiples, major European benchmarks still have room to advance.

UK mid-caps could emerge as the next growth driver

Within the UK market, HSBC is particularly bullish on the FTSE 250 index. Despite a sharp recent rebound, the index still trades roughly 25% below its 10-year average on a forward price-to-book basis, indicating considerable room for valuation recovery. More importantly, earnings growth leadership could shift from large-cap firms to mid-cap companies by 2027. HSBC forecasts that FTSE 250 constituents will post EPS growth of around 14% in 2027, significantly outpacing the FTSE 100's approximate 5% expansion. Additionally, the FTSE 250 carries a higher share of UK domestic revenue exposure, meaning mid-cap firms typically receive more direct support if the country's economy improves.

European domestic revenue share hits highest level since 2017

This trend is not confined to the UK. HSBC pointed out that the share of European companies' revenue derived from their home markets has climbed to 51.2%, the highest reading since 2017, implying that European equities are becoming more sensitive to regional economic growth. Should the European economy continue to improve, a pickup in domestic consumption, investment, and business activity would translate more directly into revenue growth for listed companies. However, with roughly 49% of European corporate revenue still generated overseas, currency movements remain a critical variable for earnings. HSBC estimates that a 5% depreciation of European currencies against the US dollar could add approximately 3.1 percentage points to European corporate EPS growth in 2026. This is because a large number of European firms earn dollar-denominated revenue overseas, and when the euro or pound weakens, the value of those earnings rises when converted back into local currencies.

Italy upgraded, France downgraded

In terms of country allocation, HSBC upgraded Italy to "overweight," citing improved GDP growth expectations, stronger momentum in corporate EPS, and the country's relatively low reliance on natural gas and LNG supplies from the Middle East. Given persistent uncertainty in the energy market, lower exposure to Middle East energy supplies means Italian firms face a more limited risk of energy-related shocks. In contrast, HSBC downgraded France to "underweight," noting that macroeconomic forecasts there are deteriorating, consensus expectations for corporate earnings are worsening, and persistent pressure on consumer discretionary sectors remains a challenge for the French market.

Overall, HSBC's upward revision of the Euro Stoxx 600 target reflects a more constructive outlook on the region's medium-term prospects. In the near term, the 680-point target for end-2026 implies roughly 7% upside from current levels, while the 760-point goal for end-2027 expands cumulative potential gains to around 20%. Meanwhile, the driving forces behind European equities are likely to gradually shift from valuation repair to earnings delivery, with UK mid-caps, the Italian market, and companies with higher domestic revenue exposure deserving closer attention.