The economic outlook for Europe and expectations for corporate earnings have significantly improved. Following a period of robust development, the analyst team at J.P. Morgan Asset Management anticipates earnings growth of up to 15 percent for 2026. Since the beginning of the year, analysts have already revised their forecasts upwards. A substantial part of these upward revisions has been observed in the energy sector, but the capital goods, utilities, semiconductor, and banking sectors also show higher estimates. Michael Barakos, Portfolio Manager for European Equities in J.P. Morgan Asset Management's International Equity Group, explained that this development illustrates a broad-based upward trend in earnings forecasts.
According to Mr Barakos, the primary reasons for the improved earnings outlook largely stem from policy decisions. He elaborated that factors which previously created economic headwinds for Europe are now proving supportive. Europe is in a sustained period of fiscal expansion, which is expected to strengthen domestic demand. European fiscal rules, as well as the regulatory environment, have undergone a fundamental reorientation. The focus of regulation is now on competitiveness, as demonstrated, for example, in the Nordic telecommunications market, where consolidation could contribute to margin improvement. Mr Barakos cited fiscal stimulus, the expansion of AI infrastructure, and sound financing conditions as further factors for medium-term tailwinds.
Europe's Positioning and Telecommunications Potential
European companies are well positioned to generate returns in areas where artificial intelligence meets real-world applications, such as in energy and network equipment or factory automation. Should AI development not meet expectations, Europe would be less severely affected, according to Barakos, as its benchmarks show a lower concentration of pure AI companies. If AI proves transformative, Europe is also likely to benefit. In conjunction with anticipated higher government spending, Europe is positioning itself as one of the few large equity regions with a growth story not primarily dependent on AI.
The telecommunications sector is showing a turning point after a decade of underperformance, as service revenue growth is once again positive. In Mr Barakos' view, European telecommunications companies combine defensive characteristics with improved fundamentals. After a decade characterised by revenue pressure, high investments in fibre optic and 5G networks, and at times intense competition, inflation and changes in market structure are now favouring price increases. Operators are increasingly focusing on 'value over volume', prioritising profitability over net new customer additions. Mr Barakos explained that the investment case for European telecommunications companies is based on a combination of pricing discipline, a more predictable decline in capital expenditure, and gradual cost reductions.
A comparison with the USA reveals potential for higher prices in Europe: providers in the EU achieve an average revenue of EUR 16 per user, while US providers reach EUR 44. This allows European providers to implement 'more for more' pricing adjustments in suitable markets. In Germany, competitive trends are heterogeneous, but rising fixed-line prices and improved operational execution at Deutsche Telekom contribute to a brightening outlook. According to Mr Barakos, the discussion about investments is increasingly shifting from the question of their volume to the speed of expenditure normalisation, without affecting competitive dynamics. Sector capital expenditure, which peaked at 18.8 percent of revenue in 2021, is projected to fall to 16.2 percent by 2028. For free cash flow, J.P. Morgan Asset Management expects an average annual growth of 7.5 percent from 2025 to 2028. From 2026/27, fibre-to-the-home rollout will largely be completed, and established providers such as Orange, KPN, and BT anticipate lower investments from this point onwards. Additionally, AI-driven cost reductions, for example in customer service and network operations, offer further leeway. Mergers could improve market structure and profitability, provided regulatory and implementation risks are overcome.
Valuation and Growth Prospects
On the stock market, the sector's rally has recently lost momentum, as investors realised profits after the outperformance of the past two years. Valuations now appear more balanced, according to Mr Barakos. By some metrics, the sector trades at a discount to the broader market, but the enterprise value to earnings before interest, taxes, depreciation, and amortisation (EV/EBITDA) ratio is above its historical average. Returns will therefore, according to Mr Barakos, more likely stem from the successful implementation of corporate goals rather than solely from rising valuation multiples. At a pan-European level, European equities trade at a valuation discount to US equities across most sectors. Mr Barakos emphasised that valuations in Europe are not excessive on an absolute basis either. As an example, he cited the European banking sector, which has outperformed the US 'Magnificent Seven' stocks over the past five years, with many credit institutions still trading at moderate valuation metrics. A sustained fundamental improvement is crucial for reducing the valuation discount between Europe and the USA.
