Navigating Choppy Waters: Big Banks Eye European Equity Bull Case but Warn of Limited Upside

Key Points

• European equity markets “face choppy, sideways trading”

• Morgan Stanley argues for “idiosyncratic alpha” amid growing “EU bull case”

• JPMorgan forecasts Stoxx 600 outperforming S&P 500 by a record 25 points

 

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European equity markets face choppy, sideways trading heading into the second half of the year, according to Morgan Stanley’s latest mid-year outlook.

The bank sees “a sustained shift into resilient pockets of the market, & plenty of idiosyncratic alpha under the surface”.

And while it sees “limited index upside for now”, the foundations of an “EU bull case” are being built.

Party Like It’s 1990s

MS is pulling out its 1990s playbook for this market, saying this indicates choppiness ahead. “We see parallels between the economic uncertainties created from the temporary c.150% spike in oil prices at the outset of the Gulf War and heightened tariff uncertainty today,” they write.

European equities’ reaction to tariff escalation and subsequent de-escalation have “largely matched this period”.

“Our playbook suggests uncertainty lingers, limiting the extent of recovery in business confidence, investment, and, most of all, hiring and consumer confidence. While a global recession is not our economists' base case, the slow pace of growth expected from here broadly matches our early 1990s playbook, suggesting sideways, choppy EU equities trading, low earnings growth, and a sustained shift into resilient pockets of the market.

Outlook

MS says there is 3% upside to its new 2250 MSCI Europe June 2026 target, or+8% with dividends and buybacks.

But there are two things to consider

• If you assume the bank’s FX team's new 1.25 EUR/USD and 1.45 GBP/USD June 2026 forecasts, the target would actually imply -2% low case downside

• MS has also introduced a 'moderate' bear case with -14% downside in which the US reverts to 20% tariffs on the EU post the 90-day pause and the EU responds with reciprocal measures

It comes after a Bloomberg poll of 20 strategists indicated growing positivity among big banks about European stocks. JPMorgan’s and Citi’s for the Stoxx 600, for instance, suggested a marked outperformance of European equities over the US this year. JPMorgan set a target for the Stoxx 600 at 580 points, while Citigroup predicts a 4% rally to 570 points. JPMorgan’s forecasts for the Stoxx 600 imply outperforming the S&P 500 by a record 25 points. Citi’s would imply the best relative performance for Europe vs US since 2005.

Europe Bull Case?

MS defines its European bull case as follows

1) high political will around the Savings & Investment Union with progress on securitization deregulation likely June 17,

2) signs of AI adoption ROI with MSCI Europe >60% weighted to adopters

3) execution around Germany's fiscal expansion with project awards likely from the autumn

4) structurally rising defence spending which should ultimately include rising tech investment

5) Resilient M&A activity supported by steadily easing competition rules, healthy balance sheets, and a hunt for growth in still fragmented markets.

Sector Watch

Accompanying the mid-year outlook on European equities, Morgan Stanley has upgraded Banks to Overweight and downgraded Metals & Mining and Semiconductors to Underweight.

The bank remains OW Defence, Telecoms, Software, Business Services, Real Estate & DivFins, whilst Luxury remains at the bottom of its sector model.

Bottom Line

European equities have had a good run and while there are positive catalysts, things could get choppy from here.