Europe’s new growth regime

EUROPE’S next investment opportunity may have less to do with consumers opening their wallets and more to do with governments and companies spending heavily to rebuild what the region has neglected for years.

From defence and power grids to energy storage, factories and digital infrastructure, Europe is entering a period of strategic rebuilding that could reshape where investors look for returns in the years ahead.

For investors heading into the second half of 2026, the opportunity is increasingly about backing the infrastructure of a more self-reliant Europe rather than simply buying into a broad economic recovery.

Amundi Investment Solutions sees the region entering a “new growth regime”, as two pillars that have supported its economic model for decades – Russian energy and US security guarantees – become less dependable.

That shift is forcing Europe to spend more on its own strategic capabilities, creating a potentially long investment runway.

Capital is already moving towards themes linked to strategic autonomy, particularly defence, technology and infrastructure. An important part of the opportunity is the modernisation of existing assets, rather than simply building new ones from scratch.

“These represent a supportive backdrop for investments, as such opportunities tend to be more predictable than new-built investments,” Amundi says.

That distinction could matter to investors. Large-scale refurbishment projects can offer greater visibility than speculative greenfield developments, while also benefitting from government support and established demand.

Europe’s ageing infrastructure, therefore, is becoming less of a liability and more of an investment opportunity, the fund management company points out.

The region needs to upgrade electricity grids, expand energy storage, modernise transport and industrial systems, and strengthen its defence capabilities. At the same time, governments are increasingly aligning policies with the broader goal of improving Europe’s competitiveness.

Amundi says several initiatives are moving in the right direction, although execution remains uneven and investment opportunities are unlikely to develop at the same pace across countries and sectors.

That makes stock selection increasingly important.

Rather than taking a blanket approach to European equities, investors could focus on companies and financial platforms that provide the building blocks for this new economic model.

Amundi identifies defence, grids, storage, capital goods, infrastructure and private markets as areas likely to benefit from the region’s longer-term growth story.

The winners may not always be the most obvious household names. Companies supplying the equipment, financing and systems needed to rebuild Europe’s strategic capacity could be better placed to benefit from the spending cycle.

By contrast, sectors driven mainly by consumer demand may struggle to keep up unless they gain indirectly from public investment or the reshoring of supply chains.

Energy-intensive businesses such as transport face a tougher backdrop, while oil and gas prices could remain elevated. Amundi notes, however, that weaker earnings expectations in these areas are already reflected in valuations.

Gaining traction

The emerging investment story is gaining traction just as international investors are beginning to warm to European stocks.

According to a recent Bloomberg report, Europe’s equity market is showing signs of becoming more than a temporary trade based on cheap valuations. Earnings, economic growth, investor sentiment and fund flows are all pointing towards a broader change in market behaviour.

European companies are reporting their strongest earnings growth in four years, at 17%, while economic momentum is at its strongest since March 2023, according to a Bloomberg report.

“There is definite excitement about Europe,” BlackRock international chief investment officer for fundamental equities Helen Jewell says, noting that the region’s resilience has surprised investors and demand remained stronger than expected.

This is significant because the old European equity pitch was relatively straightforward: buy the region because it was cheap compared with the United States.

That argument is becoming less powerful as valuations rise. According to Bloomberg, the Stoxx 600 is now trading at around 15 times forward earnings, its smallest discount to the S&P 500 in four years.

The more interesting question now is whether Europe can justify those higher valuations through stronger and more durable earnings growth.

So far, investor positioning suggests confidence is returning.

Bloomberg has highlighted Bank of America’s latest survey showing a net 2% of fund managers were “overweight” European equities, compared with 15% who were “underweight” in June.

Citigroup also found Europe was the only major region to record a meaningful improvement in risk appetite in the final week of July.

That leaves room for further inflows if economic and earnings momentum holds up.

The investment opportunity is also becoming broader as investors rethink their exposure to artificial intelligence (AI).

According to Bloomberg, the first phase of the AI rally rewarded companies associated with heavy spending on the technology.

Investors are now looking further down the chain, seeking businesses that can benefit from that spending or use AI to improve margins.

European semiconductor-related companies have been among the strongest performers in the Stoxx 600, while banks and industrial companies are attracting investors looking for alternatives to volatile technology stocks.

“Even if the AI momentum picks up again, investors are well aware of lingering volatility in the sector, which means tech is now a complementary rather than contradictory trade,” Citigroup’s Beata Manthey was quoted as saying in the Bloomberg report.

That shift towards diversification could reinforce Europe’s appeal, particularly because its market is less concentrated in mega-cap technology stocks than the United States.

Still, the rally is not without risks.

Geopolitical developments remain important, with Bloomberg reporting that signs of cooling hostilities between Washington and Tehran have improved sentiment, although concerns remain over the full reopening of the Strait of Hormuz.

Lower oil prices from their July peak have meanwhile helped ease some inflation concerns.

Monetary policy is another potential spoiler.

Edmond de Rothschild Asset Management fund manager Ariane Hayate warns in a Bloomberg report that any US Federal Reserve rate hikes could disrupt the trajectory for European stocks, although she says the overall direction remains positive.

For investors, the bigger story may be that Europe is gradually creating its own reasons to attract capital.

As strategic autonomy turns from a political slogan into actual spending on defence, energy, infrastructure and industrial capacity, the region’s investment cycle could become less dependent on simply catching up with the United States.

That points to a European market where the next winners may be those selling the tools needed to rebuild the economy – rather than merely those benefitting from an economic rebound.