Don’t Doubt the Old World

After what many see as a rough first half, attitudes toward Europe’s economies are decidedly dark. Yet economic reality is in far better shape than most realize. This divide illustrates a higher wall of worry on the Continent than in the US—which we think is a reason to be bullish on Europe.

Several factors have weighed on people’s Europe outlooks. The Iran war resurrected the 2022 energy crisis ghost, when Russia’s invasion of Ukraine drove visions of energy shortages, rationing and rolling blackouts. This year’s spike in global oil prices also sparked fears of reignited inflation forcing aggressive ECB rate hikes to squash prices—a misperception to us but a common viewpoint. The relative dearth of AI and Tech—the areas investors are most juiced about—has investors structurally less bullish on the Continent. Then there are economic data coverage and pundits cast as “weak.”

Finding Europe’s solid economic fundamentals requires looking beyond the most popular headline data, which preserves their stealthy surprise power. For example, eurozone Q1 GDP contracted -0.2% q/q, its first quarterly dip since Q4 2022.^[i] Sounds bad! However, regional economic activity isn’t actually contracting. This is a case of one small country’s quirks skewing the data: namely, Ireland’s GDP plummeting -7.0% q/q.^[ii] Excluding Ireland, some economists project quarterly eurozone GDP grew 0.2% - 0.3%.^[iii]

Notably, GDP is meaningless in Ireland. Many multinationals call the Emerald Isle home for tax purposes. These companies’ accounting moves can skew GDP considerably. It sometimes creates big drops when the domestic economy is otherwise doing fine and gives the illusion of rousing growth when things locally are shaky. This is why the Central Statistics Office of Ireland created and uses a measure called Modified Domestic Demand (MDD) to strip away multinationals’ effects and more accurately judge domestic economic activity. That metric rose 0.6% q/q in Q1.[iv]

Of the 21 euro members, just 3 contracted (the aforementioned Ireland, France and Lithuania, which both dipped -0.1% q/q). Among the eurozone’s biggest economies, the Netherlands (0.2% q/q), Germany (0.3%), Spain (0.6%) and Italy (0.3%) all expanded.^[v] Are those growth rates hot? No, but they aren’t hugely off America’s. In annualized terms to match American methodology, Dutch, German, Spanish and Italian growth rates ranged between 0.9% - 2.5%. The US grew 2.1% in Q1.^[vi]

More recent economic data point positively, too. May eurozone retail sales volumes rose 0.2% m/m after April’s -0.3% slip thanks to stronger food and drinks sales as well as non-food products (excluding fuels).^[vii] While just one data point, the growth counters fears of early-2026 pessimism weighing on spending. Germany’s long-struggling heavy industry showed green shoots, jumping 0.9% m/m in May after April’s 0.2%, a two-month positive streak after four-straight monthly contractions.^[viii] Germany’s automotive industry (3.6% m/m) contributed, as did energy-intensive industrial branches (0.2% m/m, and up 3.2% in the three-month period ending in May from the prior three months).^[ix] Eurozone industrial production echoed Q1 GDP in May, with a headline contraction skewed lower by Ireland. Oxford Economics estimated output rose 0.3% m/m excluding the Emerald Isle.^[x]

Not all the numbers are positive. S&P Global’s eurozone composite purchasing managers’ index (PMI) registered 50.0 in June, an equal share of responding firms reported growth and contraction for the month.^[xi] Italy, Spain and Ireland boosted the headline number but Germany and France remained in contraction.^[xii] That said, PMIs don’t reveal the magnitude of growth or contraction, and recent readings have proven out of step with the Continent’s hard data. As we detailed in May, France’s composite PMIs were below 50 for most of 2025, yet GDP grew every quarter; it was a similar story in 2023. The UK’s services and composite PMIs also dipped below 50 over the past few years, yet GDP didn’t enter a prolonged downturn. Mixed growth across the eurozone is better than what many expected when the Iran war started (e.g., weaker German growth due to elevated oil and gas prices).^[xiii]

Besides, stocks don’t move one-to-one with GDP or any economic measure. They are a share in corporate earnings, particularly earnings over the next 3 – 30 months. Stocks therefore care primarily about how economic drivers affect profits, so it is noteworthy that despite mixed economic data, expectations for Q2 European corporate earnings have brightened. Per FactSet, Q2 earnings estimates for the MSCI European Monetary Union (EMU) improved from 5.7% y/y growth at the start of the year to 11.7% as of July 14.^[xiv] Of the 11 sectors, Q2 earnings for just 3 (Health Care, Materials and Utilities) are expected to contract year over year.^[xv] Bloomberg noted European analysts’ upgrades of profit estimates have exceeded downgrades for 10 straight weeks, the longest stretch in two years.^[xvi]

Higher oil prices due to the Iran war are expected to boost Europe’s energy firms, which is likely a one-off spike. But Energy isn’t alone enjoying earnings growth. Analysts are optimistic about eurozone banks, forecasting solid profitability for the rest of the year, especially since the yield curve remains positively sloped—boding well for future lending. Others think European Industrials may benefit from AI-related infrastructure investments.^[xvii] Corporate America isn’t the sole contributor to global earnings—Europe Inc is adding, too.

For all the handwringing over Europe, eurozone stocks are up 8.3% year to date, not far off the World (10.9%) or America (11.2%).^[xviii] Some national markets are well ahead! But the negative attitude, skewed by dismissive looks at headline data, a lack of AI and perceptions about energy speaks to a wider gap between reality and expectations. That makes positive surprise easier to attain there—and suggests to us that eurozone stocks will return to leading markets before long, just as they did last year.