European Indices Looking to Rebound After Wall Street’s Sell-off

• European stocks and indices started Friday with a mildly positive tone. Futures on the Euro Stoxx 600 are up 0.40%, reflecting a calmer mood after a volatile US session.
• The broader global backdrop remains fragile following a weak close on Wall Street. US equities saw a very sharp selloff on Thursday, and moves across asset classes pointed more to heightened volatility than to a clear risk-on or risk-off environment.
• BNP Paribas noted that quality stocks are no longer expensive and could begin to outperform if economic growth holds up. The bank highlighted that valuations have retraced toward long-term averages.
• The MSCI Europe Quality Index is trading around its long-term average forward P/E, while the Stoxx 600 appears slightly more expensive on that basis. The valuation premium for top-quality companies has fallen to around 20%, close to the lower end of its range over the past 12 years.
• Barclays, however, is cooling enthusiasm around a return of quality stocks as market leaders, arguing that a clear catalyst is still needed. The bank points out that capital positioning in the sector remains elevated while sentiment is weak.
• Barclays also stresses that macro fundamentals continue to favor value stocks. Stabilizing real interest rates, improving macro data, and fiscal stimulus keep the risk-reward profile for value attractive, despite the recent rise in valuations.
• JPMorgan’s models indicate an “early recovery” phase, which typically benefits value stocks, small caps, and higher-risk strategies. The bank believes that easing monetary policy and a weaker dollar will continue to support cyclical stocks at the expense of defensives, with value leading the market.
• German macro data highlighted how difficult it remains to revive industrial momentum. Industrial production fell 1.9% m/m in December, well below expectations.
• Weakness was concentrated in cyclically sensitive segments. Output excluding energy and construction dropped 3.0%, driven mainly by autos (-8.9%) and machinery and equipment (-6.8%). Energy production fell 1.8%, while construction rose 3.0%.
• Despite the weak December print, the quarterly picture still suggested a small positive contribution to growth. Output in Q4 2025 was about 1% above the previous quarter’s average, consistent with GDP growth of roughly 0.3% q/q — with full details due on February 25.
• There were also signs of improving demand that could support a gradual recovery in the second half of 2026. Industrial orders jumped 7.8% in December, the strongest increase in two years, and the Ifo business climate index for manufacturing improved at the start of 2026, although it remains at low levels.
• Bloomberg Economics expects only modest growth in early 2026 before fiscal spending delivers a stronger boost later in the year. Forecasts point to 0.2% GDP growth in Q1 2026 and 0.3% in Q2 2026, with a sharper acceleration in the second half driven by infrastructure and defense investment.

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