The is forecasted to rise.
European stocks proved to be a great diversifier in the first part of the year, significantly outperforming their U.S. counterparts.
But U.S. stocks surged throughout the spring and summer months, as the major indexes reached all-time highs. Meanwhile, European stocks, as measured by the STOXX 600, basically flatlined over the summer. As a result, the STOXX 600 is still up a robust 9.3% YTD, but the S&P 500 has returned about 12.3% YTD after a slow start.
Now, as valuations of U.S. stocks have soared to above average levels, will European stocks come back into favor? Researchers at Goldman Sachs provided their take in a recent report.
STOXX 600 Forecast
Over the next 12 months, Goldman Sachs Research is forecasting the STOXX 600 index to reach 580, which would be 5% growth. The STOXX 600 is widely considered the most representative benchmark for the movement of European stocks.
That’s nothing spectacular, but it’s a solid return that could provide good diversification for potentially volatile U.S. markets. The total return, including dividends, is targeted at 8% over the next year.
European stocks are still attractive from a valuation standpoint, with an average P/E ratio of about 14 – roughly half that of the S&P 500.
However, gains could be limited by a drag on corporate earnings. For the full fiscal year, the average earnings per share (EPS) for the STOXX 600 are expected to decline 1%, down from a consensus estimate of 8% earnings growth at the start of the year.
For 2026, the consensus calls for 13% EPS growth, but Goldman Sachs is less bullish, calling for 4% EPS growth next year.
Sharon Bell, a senior strategist at Goldman Sachs Research, said the difference stems from a stronger-than-expected euro.
Goldman Sachs Research projects the euro to strengthen by about 7% over the next 12 months to 1.25 versus the US dollar. That would create a drag on European companies’ earnings as the relative value of their sales in the US declines.
A Divergence in the Force
European stocks remain solid diversifiers as they have generally diverged from U.S. stocks this year, according to Goldman Sachs.
In Europe, value stocks have outperformed while growth have performed better in the U.S. Further, European outperformance is more balanced beyond large caps, while U.S. outperformance is more concentrated among large caps.
While the best European stocks over the past 15 years or so have been those with either US dollar earnings or those exposed to China, things are changing.
“The dollar is falling, US growth is slowing, trade barriers have risen, and the Trump administration is pushing for lower US drug prices,” Bell wrote in a recent report. Meanwhile, Europe’s relationship with China has shifted into one where it is more of a competitor.
Going forward, Goldman Sachs sees value stocks continuing to outperform growth. It also recommends cyclical stocks, particularly from banks, technology, and retailers. Autos, chemicals, and commodity producers are anticipated to underperform.
Goldman Sachs also sees small caps performing well, as a stronger euro will likely hurt large international companies.