Eurozone Economic Resilience Amid ECB's Monetary Easing Cycle: Implications for Stock Valuation and Asset Allocation

Eurozone Economic Resilience Amid ECB’s Monetary Easing Cycle: Implications for Stock Valuation and Asset Allocation

Core Conclusions and Key Summaries

• The ECB’s easing cycle is nearing its end; markets generally expect rate cuts to have basically ended, with the deposit rate forming a “policy floor” around 2%. Web search shows: Money markets have reinforced the view that the easing cycle has ended; traders bet on a less than 10% probability of rate cuts before mid-2026 (vs. 40% about a month ago); there are also bets on the ECB raising rates as early as 2026 (probability ~25%) [1].
• Eurozone growth expectations are revised upward, reflecting “weak recovery + resilience”. ECB forecasts: 2025 GDP growth of 1.4%, 2026 of 1.2%, stable at 1.4% in 2027-2028 [1]; inflation approaching target, with CPI at ~1.9% in 2026, ~1.8% in 2027, and back to 2% in 2028 [1]. Web search also shows signs that Lagarde said “may revise upward growth expectations” (e.g., 2024 forecast revised from 0.9% to 1.2%) [2].
• Stock market performance and driving characteristics show “valuation bottom + rebalancing”: European value stocks, banks, and cyclical themes are relatively dominant, forming a clear style divergence from U.S. growth/tech-driven [5]. Web search shows: European bank stocks are expected to deliver historically strong performance in 2025 (best since 1997), with valuations shifting from deep discount to “growth and capital return” narrative [3]. Strategy institutions are generally optimistic about European stocks in 2026 (no strategist predicted significant decline in Bloomberg survey; median target is ~7% to Stoxx 600 ~620 points) [4].
• Valuation and allocation implications: Under “easing bottoming out + weak growth recovery”, European valuations and dividend yields still have relative advantages; style favors value, financials, and themes benefiting from fiscal spending (defense, infrastructure, industrial upgrading). However, structural headwinds like “manufacturing contraction, AI-related capital expenditure intensity, and energy price volatility” require risk hedging and diversification [3,5].
• Risk warning: If U.S. “AI inflation” reappears or energy/geopolitical shocks push up secondary inflation, expectations of ECB easing bottoming out or even turning tighter may rise, potentially suppressing high-valued and long-duration assets [2].

Key Data and Facts (from tools and web search)

• Major European indices (period performance, based on broker API): DAX:24174.62→24881.54, +2.92%, range22943.06–24916.42, 20-day/50-day moving average ~24246.71/23994.89, daily volatility ~0.79% [0]. CAC 40:7743.44→8164.65, +5.44%, range7648.13–8314.23,20-day/50-day moving average ~8120.07/8105.47, daily volatility ~0.66% [0].
• Sector and theme characteristics: Web search shows European bank stocks performed strongly in 2025; entering 2026, it is “no longer a deep value repair, but more regarded as a growth/efficiency/capital return-driven industry” [3]. In addition, defense, infrastructure, and fiscal-related spending themes have become important drivers (auto and tech-related sectors were also active in some phases) [3,5]. U.S. sector performance can be used as a comparison (industry rotation mapping at the same time): Industrials +2.34%, Financials +2.21%, Consumer Cyclical +1.78%, Basic Materials +1.61%, Tech -0.31%, Healthcare -0.33%, Energy -2.64%, Utilities -3.19% [0].
• Interest rate and inflation expectations (ECB and market): ECB kept the deposit rate unchanged at2.0% for the fourth time in December2024 (refinancing rate2.15%, marginal lending rate2.40%), and revised upward growth forecasts to1.4% in2025 and1.2% in2026; inflation forecasts are1.9% in2026,1.8% in2027, and2.0% in2028 [1]. Markets have certain bets on rate hikes in 2026 (probability ~25%), while expectations of rate cut space are significantly compressed (probability of25bp rate cut before mid-year <10%) [1]. Some reports mention ECB officials believe the rate cut cycle is likely over [1].
• Economic structure and PMI (web search background): Web search shows Eurozone manufacturing PMI is still in contraction range, while services remain in expansion, presenting a dual pattern of “manufacturing contraction + service sector resilience” [2]. Some search results also show clues of Eurozone achieving strong quarterly growth in two years and marginal improvement in PMI, but no complete numerical sequence was given in the tools called this time [2]. If itemized PMI and country-specific data are needed, they can be supplemented in the “Deep Research Mode”.
• Market sentiment and strategy views: Bloomberg strategy survey (end of 2025) shows that most are bullish on European stocks in2026; no one predicts significant decline, with median target of Stoxx600 ~620 points (~7% upside) [4]. Web search emphasizes “U.S.-Europe style/theme divergence”: U.S. is dominated by AI growth stocks, while Europe is led by banks, value stocks, and fiscal spending-benefiting themes [5].

Chart Description (based on Python generation and tool data)

• Chart1 (414ba88d_eurozone_analysis.png) contains four views:

1. DAX vs CAC40 trend comparison: Based on tool data’s period open/close/high/low and moving averages, showing relatively stable upward trend from Aug2025 to Jan2026 [0].
2. Manufacturing PMI vs Service PMI (quarterly, web search background): Schematically presents the divergence between manufacturing in contraction and services in expansion [2].
3. ECB deposit rate path: Shows the plateau after rate cuts from mid-2024 to mid-2025, and marks the current ~2% “policy floor” [1].
4. Inflation and GDP growth forecasts (ECB official data): Shows CPI falling to a range slightly below 2% and GDP on a stable path around1.2–1.4% [1].

Implications for European Stock Valuation and Asset Allocation (systematic analysis based on available information)

• Valuation Attractiveness and Style Bias
  • Dividend and valuation cost-effectiveness: Web search shows that European stocks are generally undervalued relative to U.S. stocks, with attractive dividend yields (relevant reports emphasize performance of value stocks and bank sector) [3,5]. The bank sector is evolving from “deep discount” to “growth execution and capital return” narrative; valuation repair is accompanied by repricing of earnings and capital returns [3].
  • Industry and theme allocation: Against the backdrop of interest rates peaking and falling, and fiscal spending increasing, beneficiary directions include financials (banks), defense, infrastructure, and related industrial chains [3,5]. Meanwhile, manufacturing weakness means maintaining the idea of “selecting leaders + hedging” for pure export and capital goods chains.
• Macroeconomy and Policy as a “Double-Edged Sword”
  • Growth resilience: ECB’s upward revision of growth expectations and service sector resilience in PMI form support for valuation repair [1,2].
  • Policy constraints: Easing bottoming out and even bets on rate hikes in2026 mean limited space for valuation compression; however, if secondary inflation (cost increases driven by energy and AI investment) triggers rising expectations of monetary tightening, it will push up risk premiums and suppress long-duration assets [1,2].
• Structural Factors: AI, Energy, and Geopolitics
  • Web search suggests that “AI inflation” is a potentially underestimated risk in 2026; large-scale AI capital expenditure may push up chip and electricity costs, exacerbating inflation and financing cost pressures, and weakening the attractiveness of high-valued growth stocks [2].
  • Uncertainties such as Europe’s energy structure, geopolitics, and tariffs may increase volatility, strengthening the allocation weight of assets with high dividends, stable cash flows, and defensive attributes.
• Market sentiment and rebalancing: Web search shows that the “U.S. exceptionalism” has cracks; global investors are increasing exposure to non-U.S. markets like Europe [5]. European value/bank themes form a style hedge against U.S. AI growth.

Asset Allocation Framework (scenario and path recommendations based on available information)

• Base case (easing bottoming out + weak growth recovery): Overweight value/banks and fiscal beneficiary chains (defense/infrastructure); moderately overweight core assets of consumption and service sectors; maintain neutral stance on U.S. growth/AI, and use European value side for style hedging.
• Risk scenario (AI/energy-driven secondary inflation): Maintain selected exposure to banks and some industrial chains (relatively beneficial in rising interest rate environment); increase defensive (high-dividend utilities/essential consumption) and short-duration assets; reduce exposure to high-valued and long-duration growth stocks.
• Time dimension: Short-term (0–12 months) focus on “easing bottoming out → valuation repair + dividend strategy”; medium-term (1–3 years) focus on structural themes of “fiscal spending + industrial upgrading”, while tracking marginal changes in inflation/interest rate expectations and PMI sub-items.

Data Limitations and Risk Warnings

• This analysis is based on index period data, market forecasts, and web search information returned by current tools; complete daily valuations (e.g., P/E, P/B, dividend yield time series) of STOXX600/Euro Stoxx50 and high-frequency PMI data were not obtained. Some web search results are qualitative/summary in nature and do not provide complete numerical sequences. Therefore, statements involving “historical highs” and “best performance” are based on the original web search text; this report does not conduct additional numerical calibration or backtesting.
• If you need more rigorous quantitative backtesting, country/sector-specific valuation comparisons, scenario simulation, and sensitivity analysis, it is recommended to enable Jinling AI’s “Deep Research Mode”. In this mode, professional broker databases and high-frequency data can be called to perform more accurate valuation quantiles, factor exposure, stress testing, and strategy backtesting.
• Major risks include but are not limited to: unexpected secondary inflation, faster-than-expected ECB policy shift pace, geopolitical and energy shocks, AI investment return not meeting expectations, and fiscal execution pace falling short of expectations.

References
[0] Jinling API Data (index and sector data)
[1] Yahoo Finance Hong Kong – ECB rate frozen for fourth time, markets bet on possible rate hike in2026 (reports ECB rate unchanged at 2%, growth and inflation forecasts, and rate hike bets in 2026)
[2] Yahoo Finance Hong Kong – Lagarde: ECB may revise upward growth expectations (growth forecast revision clues, dual structure of manufacturing PMI and services)
[3] Yahoo Finance Hong Kong – Reports on European bank stock performance in2025 (historical performance of bank sector and valuation repair narrative)
[4] Bloomberg – Strategists bullish on Europe in 2026 (Bloomberg strategy survey, Stoxx600 target)
[5] Yahoo Finance Hong Kong – Reshaping of stock market pattern in 2025 (macro background of U.S.-Europe style/theme divergence and diversification trends)