Goldman lifts European stocks outlook despite Middle East conflict

Goldman Sachs has raised its 12-month target for the STOXX 600 index to 660, citing resilient corporate earnings growth and continued support from artificial intelligence-related investments despite the ongoing conflict in the Middle East.

The pan-European benchmark index has remained close to record highs and gained 2.5% in May.

However, escalating tensions in the Middle East have weighed on investor sentiment and limited further gains.

The new 12-month target implies an upside of approximately 5.4% from the index's last closing level of 626.

Higher short-term targets reflect confidence

According to a note dated Friday, Goldman Sachs also increased its three-month and six-month targets for the STOXX 600 to 640 and 645, respectively.

There was no immediate clarification regarding the brokerage's previous target levels.

Explaining the rationale behind the upward revision, Goldman Sachs said, "Solid nominal growth, positive revisions in energy, and resilient margins across the rest of the market have underpinned the move (rally)."

The brokerage added that optimism surrounding artificial intelligence-related investments has also helped support the market's advance.

Inflation and interest rates remain a constraint

Despite the positive outlook, Goldman Sachs cautioned that inflationary pressures and expectations that interest rates could remain elevated for a longer period continue to act as a constraint on market valuations.

The brokerage noted that valuations could otherwise be higher if these macroeconomic concerns were less pronounced.

While European equity markets have not experienced the same degree of concentration seen in US markets, Goldman Sachs said the rally has still been driven largely by AI-related companies and the energy sector.

In contrast, consumer-focused sectors have lagged behind the broader market performance.

Valuation gap with US stocks persists

Goldman Sachs highlighted that the STOXX 600 remains relatively cheaper than the US benchmark market when measured by forward earnings multiples.

The brokerage noted that the STOXX 600's 12-month forward price-to-earnings ratio currently stands at 17.55.

This compares with a forward price-to-earnings ratio of 27.94 for the S&P 500.

The valuation difference continues to support the case for investors seeking opportunities outside the United States.

Earnings growth expected to moderate

Looking ahead, Goldman Sachs forecasts earnings-per-share growth of 10% for the STOXX 600 in 2026.

The brokerage expects earnings growth to slow to 5% in 2027 as higher energy costs begin to weigh on corporate profit margins.

While earnings are projected to remain positive, the pace of growth is expected to moderate over time.

International investors continue to allocate to Europe

On investor positioning, Goldman Sachs said international investors continue to direct capital toward European equities, attracted by relatively attractive valuations and diversification benefits.

At the same time, domestic investors remain more cautious.

According to the brokerage, concerns over weak economic growth and broader uncertainty continue to temper enthusiasm among local investors.

Goldman Sachs also argued that worries about equity supply may be overstated.

"At the same time, concerns around equity supply look overdone, with appetite for the market to absorb more," Goldman added.

The brokerage's revised targets suggest that, despite geopolitical risks and macroeconomic headwinds, it expects European equities to continue finding support from earnings resilience, AI-related investment themes, and ongoing international investor interest.