European earnings growth expectations are closing in on those in the United States for the first time in more than three years. According to Sina Finance, analysts expect third-quarter profits at MSCI Europe constituents to rise 23% year over year, just below the 24% forecast for S&P 500 companies. European earnings last outpaced U.S. earnings in the first quarter of 2023. Resilience in both economies has supported market optimism, and the Stoxx Europe 600 could outperform the S&P 500 in October after lagging for two consecutive quarters.

Leverage Shares senior research analyst Violeta Todorova said Europe’s relative value is improving, citing moderate valuations, strengthening earnings momentum and less concentration in a handful of mega-cap technology companies. Reported results have also been strong: ASM International raised its sales guidance on Wednesday and its shares gained about 4%; Deutsche Bank rallied after beating expectations; and EssilorLuxottica shares surged about 16% after strong results last week.

Technology accounts for about 9% of the Stoxx Europe 600, compared with 38% of the S&P 500. The Stoxx Europe 600 trades at about 14 times forward earnings, below its February peak of 16 times and near its long-term average. Since June, it has traded at an approximately 25% valuation discount to the S&P 500. High oil prices and persistent geopolitical tensions have weighed on sentiment, while the index has struggled to break its record set in mid-August. Consumer stocks have also come under pressure amid weaker demand and inflation concerns: Unilever fell 2%, Volkswagen declined after returning to a loss, and Kering and Hermès shares fell after reporting results.

Todorova said Europe’s test next year will be whether earnings growth spreads beyond energy, with sustained growth across industrials, banks, consumer companies and technology-related sectors requiring a recovery in demand and stronger corporate investment. BlackRock EMEA equity strategy head Rob Powell said European stocks could be volatile around next week’s U.S. midterm elections but maintained a positive long-term outlook. A Citigroup indicator showed that analyst upgrades to European earnings forecasts outnumbered downgrades over the past six months, the longest such run since 2022; U.S. earnings forecasts have been cut in recent weeks following upgrades that began in mid-April. RootBridge Capital managing partner Alpesh Patel said investors are willing to buy sustainable earnings rather than short-term surges, and that capital would continue flowing into Europe if improving returns on capital, stronger cash flow and earnings upgrades were broadly present.