Europe is lining up for a stronger economic phase than the United States, according to John Bilton, head of multi-asset strategy at JP Morgan Asset Management.
Bilton, a self-declared fan of the new world, argued that policy support and attractive valuations make Europe better placed to surprise on the upside.
“In terms of our expectations of returns this year on our baseline view for the US, there's maybe another 3%-4% total return available given our index targets, once we ticked the dividend. In Europe on our baseline, it's more like 10 to 12% – so the base case expectation is meaningfully better for Europe,” Bilton said. “Some of that is also coming through when we turn it into dollar terms, because we expect the euro to appreciate a little from here.”
He forecast the currency to reach 1.20 against the dollar at the end of the year – which gives “another little tailwind”.
Policy tailwinds and valuations
The return differential, he noted, reflects a stronger cyclical position in Europe after years of economic stagnation. “Europe has a lot going for it. Its economy looks very much like it's in early cycle, whereas the US is somewhere in the beginning phases of late cycle,” he said.
“The biggest kicker” for the old continent, which has kept the market afloat despite earnings expectations dropping from 8% to 1% for 2025, is the combination of falling interest rates and increased fiscal outlays. German capital spending, in particular, has encouraged a reassessment of European cyclicals, including industrials.
“If you'd told me at the start of the year that earnings expectations would drop by seven percentage points to flat, I’d have expected the European index to fall. But instead, it’s gone sideways. That’s because people are waking up to the fact that something is going on in Europe that hasn’t happened before,” he said.
“Dual fiscal and monetary support are there for the first time since the financial crisis. To my mind, this is key to Europe performing better in 2026 and 2027.”
While acknowledging that European equities are not cheap in absolute terms, Bilton said they look favourable relative to the US.
Banking and defence diverge
The head of multi asset was especially positive on European banks, which have undergone a quiet transformation since the financial crisis.
“This is a stat which shocked me,” he said. “The European banking sector, in dollar terms, has outperformed the Magnificent Seven over the past five years, but it’s still lower than where it came out of the financial crisis.”
Valuations remain below US peers, but profitability and capital return have improved. “These are cash-generative businesses buying back stock, transformed into utility-like financial services,” he said. “There’s low growth potential to come through that supports the sector.”
He was more cautious on defence stocks, despite a strong run driven by rising budgets. “The sector is up 51% this year; the STOXX 600 is up 9%. One of the biggest names is up 180%,” he said. “But it’s hard to see much more juice from pure multiple expansion.”
While analysts still expect earnings to catch up with the recent re-rating, he said the broader European market offered more attractive entry points, as the defence trade “may have already passed.”
Outlook by region
Across the continent, southern Europe remains the star outperformer, with Spain leading and Germany still struggling. But Bilton said the region’s industrial core could soon catch up. “For our call to reach and go beyond trend growth, we need Germany to start moving forward.”
He also welcomed greater regional cohesion in response to global trade tensions. “[US vice president] JD Vance has probably done more for European unity than anyone since Mario Draghi, just by annoying people enough to get them to pull in the same direction,” he said.
The US
Although bullish on Europe, Bilton said his team does not expect US equity markets to fall out of favour entirely. In upside scenarios, he projected returns similar to Europe’s 11-12%, if fiscal offsets and regulatory easing materialise.
But current index-level valuations leave little margin for error: “It’s difficult to get excited unless we see a big upside surprise in underlying growth.”
The manager has been underweight in places such as materials and industrials, which are could feel the impact of tariffs more than other areas, alongside consumer staples.
“We prefer to avoid those sectors most at risk of tariffs rolling through into earnings – but also, in aggregate, where valuations are probably at the upper end of what can be reasonable, even outside the major players in tech.”
On the other hand, he sees good cashflow generation in tech and communication services. The banking sector will also be a place “to perhaps get excited”, while he continues to like areas such as utilities.
However contained his enthusiasm for the US might be, Bilton stressed that fears over the US economy were exaggerated. “The narrative of ‘sell America’ or the ‘end of American exceptionalism’ are wide off the mark,” he said, for “who else are you going to buy your tech from?”