Summary of Key Points
In 2026, European stock markets, such as the STOXX600 and the German DAX, have transformed from being "forgotten corners of capital" into new havens for investors seeking shelter from market volatility, driven by the profits of industries unrelated to AI, such as banking, manufacturing, and energy. Although they are currently experiencing high-level fluctuations, the fundamentals still support their performance in the medium term. Individual investors can participate through platforms like QDII funds, but they should be cautious of short-term macroeconomic risks (weak economy, energy issues, interest rates), and exchange rate volatility.
Why Have European Stock Markets Suddenly Become Popular? – A Profit-driven Trend Unrelated to AI
Over the past two years, the global stock market has been dominated by AI in the United States. However, 2026 has seen Europe develop its own independent trend:
- Profitability is the Key: The earnings of STOXX600 components increased by 23.4% year-on-year in the second quarter (12.3% even when excluding the energy sector), and Goldman Sachs has raised its earnings forecasts for European companies.
- AI-related Hedge Funds Flowing In: Funds withdrew from Europe in the first half of the year, but the trend reversed in July, with global investors pouring a net $12.5 billion into European stock funds. In July alone, BlackRock’s European products attracted $4.4 billion in investments.
- Low Dependence on AI: The European stock market is heavily weighted by financial (25.8%) and industrial (19.1%) sectors, accounting for over 40%, compared to just 8.6% for technology. This low correlation with the US AI market makes it a safe haven during tech stock corrections.
What Drives the Rise in European Stock Markets? – Four Key Sectors
The rise in European stock markets is not due to AI but rather the resurgence of traditional industries:
1. Bank Stocks: Benefiting from rising interest rates, European banks have seen a significant increase in net interest margins as interest rates rise. Despite a weak economy, credit quality remains stable, leading to substantial profit growth. For example, BNP Paribas reported nearly a 30% increase in profits in the second quarter, and UBS achieved its best quarterly results ever.
2. Industrial Stocks: Supported by multiple factors: German fiscal stimulus (infrastructure and defense spending), the return of manufacturing (energy/supply chain security), and increased defense spending (the IMF expects the eurozone's defense spending to rise from 2% to 5% of GDP). This has created a favorable environment for industries like industrial automation, with companies like ABB benefiting significantly.
3. Energy Stocks: The Middle East conflict has pushed up oil prices, benefiting energy companies like Shell and BP, which saw their profits double in the second quarter. Although higher energy prices are detrimental to consumers, they are a boon for energy companies, acting as a macroeconomic hedge in the stock market.
4. AI Application Stocks: European tech companies are not reliant on AI bubbles but focus on the upstream (semiconductor equipment from ASML) or downstream applications (industrial automation from ABB). These companies can directly benefit from AI-related capital spending. ASML’s stock price increased by over 60% in 2026, and the European AI application index outperformed the US cloud service sector.
Can You Still Buy Now? – Be Cautious in the Short Term, but Opportunities Exist in the Medium Term
European stock markets have reached record highs and are now in a period of high-level fluctuations:
- Short-term Risks to Watch:
- Weak Economy: GDP growth is expected to be only 0.8% in 2026, and the economy is heavily dependent on manufacturing and trade. A slow global manufacturing recovery could impact industrial profits.
- Energy Challenges: There may be insufficient LNG reserves for the winter, and a combination of energy shortages and rising food prices could lead to secondary inflation.
- Interest Rates and Politics: If inflation rebounds and the European Central Bank is unable to cut interest rates, it could pressure stock valuations. Next year’s elections in France and Italy could also affect market sentiment.
- Medium-term Opportunities: Corporate profitability remains a strong support. If German fiscal stimulus is successful and manufacturing recovers, the STOXX600 could increase by another 15%-25%.
In conclusion, avoid chasing high prices in the short term; instead, consider buying on dips in the medium term. Currently, the market is in a balance where fundamentals are relatively strong, while macroeconomic risks are more favorable.
How Can Individual Investors Participate? – Three Options with Their Own Advantages and Disadvantages
For domestic investors looking to invest in European stock markets, there are three options:
1. QDII Funds: The simplest way to get started, such as the Huaan Germany DAX ETF or the SDIC Morgan Europe Power Fund, which allow you to buy directly in RMB without the need to exchange currency. However, cross-border ETFs may have a higher premium (the purchase price is higher than the net asset value) due to quota restrictions.
2. Hong Kong Stock Connect: Suitable for investors with larger capital sums. It requires a minimum investment of 500,000 RMB and can be operated through an A-share account, but the range of available stocks is limited, excluding well-known European companies like ASML and LVMH.
3. Overseas Brokers: Offers flexibility but is more complex. You can buy individual stocks directly, such as ASML and Shell, but you need to exchange currency, understand local trading rules and taxes, and be aware of exchange rate risks.
Long-term Investment Value: European assets provide stable dividends and cash flows, which can help diversify risks associated with the AI market. After the AI boom subsides, corporate profitability and competitiveness will be the key to long-term returns.
Finally, remember to consider exchange rate fluctuations and macroeconomic risks when making any investment decisions. Don’t blindly chase high prices!