European equities are entering a different phase. Broad valuation gains have already done much of the work, so future progress is more likely to depend on earnings growth, cash generation and capital allocation. That puts greater emphasis on individual companies.
The earnings picture is improving. More analysts are raising forecasts for European companies than cutting them, while margins outside the energy sector have reached new highs. The recovery is also spreading beyond semiconductors and industrial equipment into banks, utilities, transport and travel. Almost every major European sector is now expected to grow earnings this year.
Tariffs have yet to feed fully into many company results. Higher energy and commodity costs could put fresh pressure on inflation and consumers. Chinese competition remains a challenge for parts of European industry, while increased German infrastructure spending is likely to reach company order books gradually.
Valuations also matter more than they did a year ago. Some parts of the European market now look more fully valued, even though many sectors still trade below comparable US companies despite increasingly similar profitability and earnings prospects. That narrows the case for simply buying the market and strengthens the case for focusing on individual businesses.
Europe is also less dependent on its domestic economy than it can appear. More than half of the revenues generated by companies in the MSCI Europe Index come from outside Europe and the UK. Emerging markets contribute around 30 per cent of revenues and North America approximately 24 per cent. European-listed companies therefore provide exposure to global industrial activity, currencies, supply chains and international investment, not just regional economic growth.
Artificial intelligence is one area where that global exposure is already visible. Around one in five MSCI Europe companies has direct revenue exposure to AI-related activity. That includes suppliers of semiconductor equipment, electrical systems, power management, cooling technology and industrial automation. These businesses provide the infrastructure needed to build data centres and support rising computing demand.
Banks could use AI to automate compliance, onboarding and customer-service functions. Insurers could apply it to underwriting and claims analysis. Other companies may use AI to improve pricing, automate workflows and raise productivity.
Some AI infrastructure companies have already risen sharply, while the benefits for many future users remain difficult to quantify. The key issue is whether a company has assets that are hard to replicate, such as proprietary data, mission-critical systems or deeply embedded customer relationships.
Smaller European companies are part of the picture too. Businesses with strong balance sheets, scope to gain market share and valuations that leave room for recovery may become more attractive as earnings conditions improve. Takeover activity has also shown that strategic and private-equity buyers can place a higher value on some businesses than public markets do.
Fidelity European Trust PLC (LON:FEV) aims to be the cornerstone long-term investment of choice for those seeking European exposure across market cycles.
