A higher target for the STOXX 600 reflects renewed confidence in earnings momentum, global growth, and transatlantic investor interest.

Goldman Sachs has raised its 12-month forecast for Europe’s benchmark STOXX 600 equity index, signalling a notable shift in sentiment toward the region’s stock markets at the opening of the year. The U.S. investment bank now expects the pan-European index to climb higher than previously anticipated, pointing to improving corporate fundamentals, resilient global growth, and a revival of interest from international investors who had long favoured U.S. assets.

The revised outlook underscores a broader reassessment of Europe’s investment case after several years in which the region lagged global peers. According to Goldman’s strategists, the balance of risks has begun to tilt in favour of European equities, helped by stabilising macroeconomic conditions and a gradual easing of pressures that had weighed on profitability. While challenges remain, the bank argues that the market is increasingly pricing in a more constructive scenario for growth and earnings.

At the core of Goldman’s optimism lies the outlook for corporate profits. European companies have shown signs of earnings resilience, even as higher borrowing costs and geopolitical uncertainty tested margins across sectors. Cost discipline, pricing power in select industries, and the ability of large exporters to benefit from global demand have supported bottom-line performance. Goldman believes that this trend is likely to continue, with earnings growth broadening beyond a narrow group of sectors and becoming more evenly distributed across the market.

Global growth prospects are another pillar of the bank’s more positive stance. Despite lingering concerns over inflation dynamics and monetary policy, the global economy has so far avoided the sharp slowdown many had feared. Demand in major economies has remained firm enough to support trade flows, while supply chains have continued to normalise. For Europe, which is deeply integrated into global commerce, this environment has translated into steadier revenues for multinational firms and improved visibility for future investment plans.

A key element of the updated forecast is the growing interest from U.S. investors in European assets. After years of heavy concentration in domestic equities, particularly in technology-related names, American portfolio managers are increasingly looking abroad for diversification and relative value. European stocks, trading at discounts to U.S. peers on several valuation measures, have become a natural destination for these flows. Goldman notes that this renewed attention has the potential to provide sustained support for European markets, especially if currency movements remain relatively stable.

Within the broader European universe, Goldman highlights small-cap stocks as particularly attractive. These companies, often more domestically oriented and less widely followed by global investors, have underperformed larger peers in recent years. As a result, valuations in the small-cap segment appear compelling, especially if economic activity continues to firm. The bank argues that even modest improvements in growth expectations could translate into outsized gains for this part of the market, given how pessimistically it has been priced.

The financial sector also features prominently in Goldman’s analysis. European banks and other financial institutions stand to benefit from a backdrop of higher interest rates relative to the past decade, which has helped restore profitability in core lending activities. Balance sheets across the sector are generally stronger than in previous cycles, with higher capital buffers and improved asset quality. While regulatory and political risks persist, Goldman sees room for further re-rating if earnings remain on track and capital returns to shareholders continue.

Still, the bank is careful to acknowledge the risks that could derail its constructive outlook. Political uncertainty in parts of the region, ongoing debates around fiscal policy, and the potential for renewed volatility in energy markets all pose challenges. Moreover, any sharp deterioration in global growth or an unexpected tightening of financial conditions could weigh on investor confidence. Goldman emphasises that its forecast assumes a relatively benign macro backdrop, rather than a dramatic acceleration in activity.

Market participants have greeted the revised forecast as a sign that sentiment toward Europe may be turning. For much of the past decade, the region struggled to attract sustained inflows, often overshadowed by the scale and dynamism of U.S. markets. A more favourable earnings outlook and the prospect of renewed international interest could help narrow that gap, at least partially, in the months ahead.

As investors navigate the early part of the year, Goldman’s message is clear: Europe’s equity markets may no longer be the perennial underperformer of global portfolios. With valuations still appealing, earnings momentum improving, and global investors looking to rebalance exposures, the STOXX 600 could find fresh support. Whether this optimism proves durable will depend on how the economic and political landscape evolves, but for now, Europe appears to be re-entering the conversation as a credible destination for equity investment.