Freedom of Curtalis
Citi remains positive for European shares until mid-2027, supported by a strong increase in profits per share. Macroeconomic opposite winds are rising (through energy prices and interest rate increases) and Europe is less oriented to the global trade of artificial intelligence. This means that there is no room for significant profits in the rest of this year. However, investor placement remains mild, arguments for holding global shares remain strong and favourable winds from fiscal policy should support diversification into European shares in the long term. This, however, keeps Citi neutral with regard to Europe in relation to world markets.
Despite the significant shock of the supply of goods, the increase in profits per share in Europe expected to remain strong and the following year, Citi estimates. It foresees a 12% increase in profits per share (EPS) for the European Stoxx 600 index this year, more than 8% predicted before but below the +16% expected by the market, as it believes that downgrades in sectors other than commodities will continue to affect the second half. For 2027 he estimates that EPS will increase by 10%.
In this context, Citi maintains its target for Stoxx 600 in late 2026, which is at 640 units from around 620 units today, while also introducing the target for mid-2027, at 700 units. This, as he points out, suggests mild gains and prolonged adversities for European shares by the end of the year, with the dynamic strengthening of the next year, as geopolitical risks are retreating. Its objectives require that valuations remain relatively stable around the current 14x P/E 12-month period. For FTSE 100, it sees an increase of about 15% to mid-2027 (11,800 units), with profits also due to corporate profitability rather than the expansion of valuations. In general, Citi continues to see overperformance of large capitalization companies.
Key Issues
The American bank highlights three key issues for European shares.
1) Geopolitics and stagnation: Since the start of the conflict in Iran, Citi economists have revised downwards the forecasts for the development of European GDP, revised upwards the inflation forecasts and now see multiple ECB interest rates increases this year. Developments around geopolitical tensions remain key to the path of markets, as he stresses.
In particular, as he points out, the conflict in Iran caused a shock to commodity prices, initially sending oil prices to $120/varelli. While European gas also rose around the start of the conflict, TTF prices remain well below 2022 levels.
Financial data from the start of the conflict in Iran show an increasingly lower growth in GDP and higher inflation for the Eurozone prospects. Citi economists have significantly revised the GDP growth of 2026 since February (in +0.7%), with inflation expected to average at 3.0% this year.
The basic scenario Citi analysts (probability 50%) predicts that the Straits of Hormuz will gradually open from the third quarter of 2026. This suggests that the average price of oil would reach $90/varelli by the fourth quarter. In a more adverse scenario (i.e., the Straits to remain closed for much of the year), Citi economists believe that the impact on growth/inflation would be much more serious than estimated today.
European shares have mostly recovered from losses at the beginning of the conflict in Iran. However, Europe is generally lagging behind, subtributing to the global index by 7 percentage points since the end of February. As Citi points out, shares tend to negotiate higher in 12 months after key geopolitical events of significant disturbances in commodity prices. Goods and defence sectors in the United Kingdom tend to overcompensate when geopolitical risks are increasing, while the German market, consumer goods and industrial products in Europe in general tend to fall short.
2) Artificial Intelligence: The return on shares has shown signs of concentration on specific market segments, with the technological sector recording huge profits since late February. At global level, fundamental sizes appear to be aligned with the continuation of this trend, so the adoption of Artificial Intelligence could help the European market then as Europe is generally quite back on the AI issue.
(3) Finance remains the focus: Despite some concerns, fiscal policy provides a significant boost to the development of the euro area, Citi stresses. This should support diversification towards European shares in the long term.
In particular, as he notes, after many years of acting as a clean blow, fiscal policy now strengthens the development of the eurozone. As the main lever of the proposed European budget, Germany is at the centre. Despite concerns about the nature/development of spending plans, Citi economists see the first signs of stimulation reaching the economy. This should become more visible in late 2026 and 2027.
According to the calculations of the US banks, European fiscal expenditure (defense + German infrastructure) could boost the regional increase in profits per share (EPS) by 2-3 percentage points per year over the next five years. The highest long-term increase in profits per share justifies higher P/E which, according to Citi, can move to an average of close to 15-16x.
At index level, Europe still seems relatively cheap when the medium-term projections for increasing profits per share are taken into account and the potential impact of budgetary expenditure, stresses Citi. However, the European stock basket more directly linked to infrastructure spending seems to have assessed developments as it has exceeded expectations in recent years, dynamics have stopped in recent months.
