Citi maintains neutral stance on European equities despite rally

Investing.com -- Citi remains neutral on European equities in its global equity allocation, even as the region's stocks have outperformed global peers in recent months.

The Euro Stoxx 50 gained 8% over three months, surpassing the S&P 500's 5% advance. Within MSCI Europe, cyclical sectors outperformed defensive stocks, with financials and health care joining technology and industrials in posting gains.

Citi identified three factors supporting European equity performance. The firm noted that European economic data has improved sharply in recent months after declining following the start of the US-Iran conflict. The bank's Earnings Revision Indices showed improvement, with most European sub-sectors receiving net earnings per share upgrades.

Europe's fiscal stance has shifted, with Citi economists estimating that fiscal policy will boost Eurozone GDP growth by approximately 30 basis points in 2026. Germany's fiscal deficit is expected to widen from about 2.7% of GDP in 2025 to about 4.0% this year. The EU's proposed long-term budget worth $2 trillion over seven years is nearing final stages.

Citi noted that European markets have smaller technology exposure than peers, positioning the region as a potential diversifier when sentiment around artificial intelligence fluctuates.

The bank cited geopolitical risks and valuations that are no longer particularly cheap as reasons for maintaining its neutral stance. Citi targets approximately 8% upside for European equities to mid-2027.

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