On Fires and GDP

Q2 eurozone gross domestic product (GDP) landed this week, and we think it was good!^[i] Growth reaccelerated to 0.4% q/q after a flat Q1, with no countries reporting thus far contracting.^[ii] We think broad-based growth is part and parcel of what eurozone stocks have been pricing in during their strong rally off late March’s lows, a sign to us of economic reality beating dim projections from many commentators we follow.^[iii] Yet we didn’t see abundant cheer in coverage of the data. Instead of toasting the bloc’s resilience amidst higher energy prices, most headlines we saw warned the party may already be over as wildfires ravage the Continent. Yet terrible and tragic as the situation is, we think economic history shows their effect on GDP is minimal, as we will discuss. For stocks, this looks to us like another false fear in the proverbial wall of worry.

Let us start with a quick look back at Q2. All quarter, we saw headlines warning eurozone economies were in a tough spot. The Strait of Hormuz’s closure and attacks on Persian Gulf natural gas infrastructure raised oil and gas prices, sparking warnings of higher costs and potential energy shortages hurting businesses.^[iv] Purchasing managers’ indexes looked weak all quarter, especially in France and Germany.^[v] The fact that these surveys measure how many businesses report growth, not how much business grew in aggregate, seemed to be of little comfort to analysts projecting tough times. Bad surveys, bad headlines, high energy prices, it all seemingly collided in weak economic expectations.

And we think the GDP data imply this was too pessimistic. The initial report has scant detail, but the four biggest economies all grew. France erased its tiny Q1 decline, growing 0.2% q/q.^[vi] Germany and Italy matched that growth rate, whilst Spain extended its solid run at 0.7% q/q.^[vii] In France, exports did much of the heavy lifting whilst consumer spending and business investment rebounded slightly from Q1’s drops.^[viii] Exports also led growth in Germany, per the Federal Statistical Office’s press release, with consumer spending “subdued” and capital formation down.^[ix] Italy didn’t publish a breakdown, but Spain notched growth in consumer spending, private investment, exports and imports, which we think shows robust domestic and external demand.^[x] Overall, we think the currency bloc has its challenges and pockets of weakness, but the strong appear to be carrying everyone along. Our research finds this, generally, is all stocks need when expectations are low.

Which is encouraging, because expectations still appear to be low, based on our interpretation of financial commentary across a range of outlets globally. Gas prices are up again as autumn creeps closer, sparking warnings Europe will have to refill winter gas reserves at a suboptimal time, placing the Continent in a tough spot.^[xi] We think this probably proves false, given much higher prices and acute shortages didn’t cause rationing or deep recession four years ago, making this one area where we think reality probably proves surprisingly ok.^[xii] But these days, the fires seem to be a much bigger talking point, and we have seen several articles warning they near-guarantee recession in France and Spain at least as they wipe out summer tourism and local businesses.^[xiii]

We don’t dismiss the pain and hardship for everyone affected. The losses are tragic and the stories of narrow escape are harrowing. Yet when viewing these things through a market lens, we think it is important to separate the human toll from the pure economic fallout, as the latter is what our research finds stocks care most about. Geologic studies show wildfires are basically as old as the planet itself, giving us a lot of data on how they affect economies when they flare in or near densely populated areas.

Here is a recent example: In January 2025, California’s Los Angeles County suffered some of its most devastating fires on record, displacing tens of thousands of people and wiping out whole communities in Altadena, Pacific Palisades and Malibu. The economic effects stretched throughout the city as tourists reportedly avoided the region for much of the winter, heeding warnings about the fires’ extended stress on city services and accommodations. County-level GDP data for 2025 aren’t available yet, but state-level data show California’s GDP flatlining in Q1 2025.^[xiv] Agriculture, non-durable goods manufacturing, management, hospitality, transportation and other services all took extremely hard hits, which looks to us like a huge chunk of Los Angeles’s economic activity (in light of the industries that loom large there, including tourism, film and television production and talent management). Yet with headline state GDP flat, we can glean Silicon Valley, Orange County and the rest of the state grew enough to offset the Southland’s weakness.^[xv] That isn’t to dismiss LA’s tragedy, but to note that the whole did ok despite severe trouble in one part. And statewide growth resumed the next quarter, continuing uninterrupted through Q1 2026 (the latest available).^[xvi]

This is just one example, but California’s GDP is on par with European countries, so it helps us scale the situation in Europe.^[xvii] And that scaling suggests to us these fires’ economic effects will likely be milder than commentators we follow warn presently. Take France. The fires concentrate in the region Nouvelle-Aquitaine. This beautiful area looms large in the public consciousness because it is wine country, home of Bordeaux. However, it generated just 7.6% of French GDP in 2024, the latest report available.^[xviii] Los Angeles County, by contrast, generated 24.8% of California’s GDP that year.^[xix] Most of France’s activity comes from Paris and its surroundings, which aren’t in harm’s way.^[xx] So if California’s statewide economic damage from 2025’s LA fires amounted to one flat quarter, it is hard for us to envisage fires in less dense areas of France—however horrible they are—doing much worse nationwide. Wineries and chateaux matter. We are big fans. But abandoned farmland represents a lot of the surface area getting burned across Southern Europe, which logically has minimal economic effect.^[xxi] Yes, we know, nuclear power plants and munitions facilities are in the vicinity, too. But protective measures appear to be in place, and we think investors generally benefit from leaning on probabilities, not possibilities.^[xxii]

We think investors also benefit from looking 3 – 30 months ahead, as our research finds markets do. We have a long, long, sad history of natural disasters and market returns. Whether we are talking fire, hurricanes or earthquakes, our studies of stock market history find none caused global bear markets.^[xxiii] Our research finds cold-hearted markets are good at scaling the situation, seeing growth continue elsewhere and moving on. To us, the likelihood that fires in Southern Europe today have a meaningful effect on global corporate earnings over the next year or two looks very, very low. Which we think means stocks should likely have an easy time finding—and rising on—positive surprise.