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European earnings under scrutiny
18/09/2026
European earnings have accelerated. Whether that warrants a lasting rerating will depend on how broadly and durably profits continue to grow.
The Bauhaus school in Dessau embraced a simple design principle: form should follow function. A good design had to prove itself in use. European earnings now face a similar test. They have risen strongly since 2021, but can that growth last?
As our Chart of the Week shows, European equities still trade at lower valuations relative to expected earnings than their U.S. peers, suggesting that investors remain cautious. Yet the Stoxx Europe 600 has had one of its strongest reporting seasons in years. Second-quarter earnings per share (EPS) rose by more than 20%, led by energy, while industrials and real estate also reported earnings growth.
The valuation discount has structural roots. European markets have more banks and capital-intensive industrial companies, whereas highly profitable technology groups, with faster earnings growth and less need for physical capital, have long dominated the U.S. market.
But the U.S. model must continue to prove itself. The U.S. market’s valuation premium rests largely on a few technology leaders that became exceptionally profitable, not least thanks to the internet. To sustain it, their AI investments must pay off primarily for their own shareholders. That is possible but far from certain.
If the productivity gains from AI spread across the economy, Europe’s relative shortage of technology giants may matter less. Companies and workers outside the technology sector could benefit worldwide, including in Europe. Research suggests that generative AI can raise productivity, particularly among less experienced and lower-skilled workers.[1] If these gains are sustained and adopted more broadly, they could offset some of the economic pressures associated with aging populations.
Beyond AI, Europe’s outlook has improved. The shift in Europe’s security policy is expected to support higher defense and infrastructure spending. Over time, this spending could spur investment in manufacturing, power grids and automation. In our view, individual national and regional election results are unlikely to alter this trend on their own. Nor do results necessarily point in the same direction, as recent results in Sweden and the German state of Saxony-Anhalt have shown. Additionally, recent economic data have been encouraging. In any case, many European companies earn much of their revenue outside their home region.
“A valuation discount alone does not make a market cheap. But right now, several factors favour European equities,” argues Philipp Schweneke, Head of European Equities at DWS. “For that to continue, the recent earnings surge must broaden and become more durable.”
The Bauhaus favoured reproducible designs that proved themselves in use rather than one-off pieces for display. Europe’s companies must now show that their latest earnings growth is similarly durable.
Sources: Bloomberg Finance L.P.; DWS Investment GmbH as of 09/15/26
* 4-Quarter Blended Forward Price-to-Earnings Ratio of the MSCI EMU Index for Europe and MSCI USA Index for the United States
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.