After a Strong Rally in European Stock Markets, JPMorgan Strategists Advise a Shift to "Selective Positioning": Financial and Industrial Sectors Become Top Picks

According to Zhitong Finance APP, as the continuous rise in U.S. Treasury yields puts pressure on the global AI-driven stock market rally, J.P. Morgan global investment strategist Madison Faller has issued the latest asset allocation signals: while the U.S. remains the "core of the portfolio," the European market is entering a new phase that requires "careful selection," and the financial and industrial sectors are becoming the most attractive value opportunities in her view.

Faller's latest remarks reveal a key shift occurring in the European market: European corporate earnings growth is catching up with the U.S., but the market has not fully priced in the structural opportunities behind this trend. Amid the strongest Q2 earnings season for Europe in three years, divergence between sectors is creating new investment windows.

European Earnings “Catching Up with the US”: The Strongest Earnings Season in Three Years Reshapes Market Narratives

European companies have just completed a milestone earnings season. According to LSEG I/B/E/S data, Q2 earnings of STOXX 600 constituents are expected to grow by 22.4% year-on-year, the strongest growth since Q3 2022. MSCI Europe index profits grew by 14%, with more than half of its constituents beating expectations—both metrics marking the highest levels since early 2023.

The drivers of this earnings rebound have clear structural features: the energy sector led with 135.8% growth, while basic materials (including chemicals, steel, and mining) climbed by 57.6%. More importantly, growth momentum is spreading—from raw materials and industrials to technology, the entire AI and infrastructure value chain achieved rapid growth, with the financial sector providing additional support.

Earnings revision trends are also sending positive signals. J.P. Morgan's strategists point out that Eurozone EPS revisions have been rising for weeks, now turning fully positive, closing the earnings growth gap with the U.S.—the first time this has happened since early 2025. Citi data show that Q2 European earnings expectations have been raised from 11% to 15%, with Q3 growth expectations at 18%.

From “Broad Allocation” to “Careful Selection”: Faller’s New European Investment Framework

Against this backdrop, Faller has outlined a clear European investment framework. She said: "Over the past few quarters, we have indeed seen an improvement in European equity earnings. I think valuations have caught up with this trend, so the key is where you focus your investments in Europe."

Faller’s core strategic logic includes several layers:

The US remains an "anchor"; given the U.S.'s economic growth and innovation potential, resilience, and higher corporate profit margins, the country "remains at the core of the portfolio." Europe shifts to "selective allocation"; "for Europe, we are taking a more selective approach to the sectors we favor."

Financial and industrials are preferred options. Faller remains bullish on the financial and industrial sectors, seeing them as beneficiaries of a more favorable economic environment. She also specifically mentioned companies with irreplaceable physical assets and limited exposure to AI disruption.

In capturing AI investment opportunities, Faller also emphasizes a “whole-industry-chain” perspective. She points out that investors shouldn't focus only on tech giants but on the entire AI industry chain—“The AI story is not confined to a single sector; what we really focus on are assets that are capital-intensive and hard to replace," she noted, specifically mentioning semiconductors, infrastructure, utilities, and industrials.

“Catalysts” for Finance and Industrials: Fundamental Improvement and AI Infrastructure Dividends

Faller’s positive outlook on finance and industrials is built on a solid foundation of fundamental improvement. The European banking sector is seeing multiple tailwinds. Faller notes that, with fundamental improvements and persistent increases in dividends and share buybacks, regional bank stocks are worth watching. J.P. Morgan strategists further highlight that banks are expected to be key contributors to Q2 earnings, possibly exceeding expectations. Productivity gains from AI adoption can help control costs, while loan loss provisions booked in Q1 are not likely to recur—since shocks like the Market Financial Solutions collapse are more idiosyncratic than systemic risks.

In Q2, the European banking sector is set to benefit from a full quarter of high interest rates, with net interest margins remaining favorable. Share buybacks and dividend growth offer additional support to valuations.

The industrial sector stands at the structural forefront of AI infrastructure building. Faller specifically points out that “capital-intensive and hard-to-replace assets” within the AI value chain are her main focus. Expansion of the entire AI infrastructure sector—from indispensable gas turbine manufacturers (such as Siemens Energy) to power equipment suppliers (such as Schneider Electric)—is generating ongoing incremental demand for Europe’s industrial sector.

By performance, the STOXX 600 industrials sector achieved 16% EPS growth and 9% sales growth in Q2. FactSet data shows that industrials, energy, and materials saw the strongest positive reactions to earnings beats.

Market Sentiment and Risk Warnings

S Bank of America’s latest survey shows that a net 53% of fund managers expect European equities to rise in the next one to three months, reflecting broad market confidence in European earnings recovery.

However, risks cannot be ignored. On August 18, the U.S. 30-year Treasury yield soared to 5.326%, the highest since 2007, triggering sharp volatility in Asian tech stocks. If U.S. Treasury yields continue climbing, it could exert systemic pressure on global risk asset valuations. Moreover, a flurry of upward earnings revisions means the bar for European performance is much higher—current valuations have risen to about 15 times forward P/E, above the 20-year average of 13 times.

Conclusion

J.P. Morgan strategist Faller’s latest views provide a clear framework for European asset allocation: the US remains core, Europe requires careful selection, and finance and industrials are the most attractive sectors at present. With European companies delivering the strongest earnings in three years and positive earnings revision trends continuing, this strategic logic is being validated by the market.

Goldman Sachs data show that except for basic resources and non-essential consumer goods, all other sectors saw upward earnings revisions in July, with technology and energy posting the largest increases. As Faller notes, the AI narrative is not limited to a single sector—those with irreplaceable physical assets, capital intensity, and beneficiaries of AI infrastructure expansion are becoming the main battleground of the next phase of the European market.