Europe’s benchmark STOXX 600 index climbed to a record high of 653.19 on Friday before easing to trade around 652.66, putting it on track for its biggest weekly gain in more than a month.

European equities are drawing a more constructive read from Wall Street, with several major brokerages revising their targets upward in recent weeks.

But the upgrades come loaded with caveats, and the gap between improving economic signals and stretched valuations is keeping even the bulls from going all in.

A Goldilocks moment, with reservations

Bank of America on Friday raised its year-end target for Europe’s STOXX 600 index to 630 from its previous forecast of 590.

The bank cited an improving euro zone growth outlook as the energy shock triggered by the Iran conflict fades and German fiscal stimulus begins to filter through to economic activity.

The bank’s economists expect euro area domestic demand growth to reaccelerate through year-end, supported by a less hawkish European Central Bank and easing inflation pressures.

Data released this week gave that view some empirical grounding.

Euro zone inflation rose less than expected in June, while S&P Global’s latest survey showed overall business activity moved out of contraction territory in June for the first time since March.

Bank of America described the current environment as a “mini-Goldilocks moment” — economic activity rebounding while price pressures moderate.

Yet the firm stopped well short of a full endorsement.

It retained its underweight rating on Europe relative to global equities.

“We remain negative on European equities despite a more constructive euro area growth outlook: the European market remains priced for perfection,” BofA strategist Sebastian Raedler said.

BofA expects the index to dip to 595 by early in the fourth quarter, weighed down by rich valuations, a potential slowdown in AI-driven market momentum, and rising credit risks, before recovering toward its year-end target.

JP Morgan and Barclays have made similar upward revisions in recent weeks, with Barclays also dropping its previously bearish stance on the region.

Where the rally could broaden

UBS analysts offered a more textured take earlier this week, arguing that Europe’s AI-focused rally has room to extend beyond technology into industrial and luxury stocks.

Re-shoring of industrial capability, government spending programmes, and brightening economic conditions will help a wider pool of companies participate, they said.

European industrials currently trade at a discount to their US peers, but the analysts expect momentum from electrification and the AI data-centre buildout to help close that gap.

Stabilising demand for luxury goods should support a rebound in that sector as well, with German fiscal spending providing an additional tailwind for domestic stocks.

BofA had also separately upgraded the United Kingdom to overweight from marketweight, while maintaining an overweight stance on Germany, saying both markets appear overly pessimistically priced relative to their underlying economic outlooks.

“While we remain neutral on European equities overall, the case for selective exposure remains strong,” UBS said.

An earnings recovery built on a narrow base

The near-term earnings picture adds another layer of complexity.

Companies in the STOXX 600 are forecast to post average earnings growth of 14.5% in the second quarter, according to London Stock Exchange Group IBES data — a headline figure that looks encouraging until it is disaggregated.

Exclude the energy sector, and profit growth falls to 5.5%, revealing how heavily the region’s earnings recovery depends on a jump in oil and gas company profits.

That concentration makes the broader market more vulnerable to any reversal in energy prices than the top-line number suggests.

Taken together, the analyst consensus points to a European equity market at an inflection point — improving fundamentals, selective opportunities in industrials, luxury and the UK and Germany, but valuations that leave little margin for error and an earnings base that is narrower than it appears.

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