Investors looking for returns beyond the U.S. market have seen stronger growth in Japanese and European equities, where companies in key industries have exceeded earnings forecasts. Andrew Slimmon, Morgan Stanley’s senior portfolio manager, pointed to rising earnings revisions as the main reason behind Japan’s stock market strength this year. European firms, especially in banking and defense, have also shown robust performance.
This trend highlights a larger pattern: companies in the STOXX 600 index reported a 24.1% increase in second-quarter earnings, the fastest growth since 2022. By late August, the index had climbed roughly 13% for the year. Banks have led the recovery after years of restructuring, according to European Central Bank Vice President Boris Vujcic, who stated last week that the region’s financial institutions now match U.S. counterparts in profitability and liquidity, though they lag in size and technology investment.
Defense-related stocks have gained prominence as European governments increase military spending due to Russia’s invasion of Ukraine and wider security risks. Beyond defense, Slimmon observed broad-based gains across sectors. However, recent market turbulence has created challenges: the STOXX 600 dropped to a three-month low earlier this month, pressured by higher oil prices, rising bond yields, and geopolitical tensions, including attacks on Gulf energy facilities.
Japan’s market performance stands in contrast to its economic struggles. On September 18, the Bank of Japan increased its policy rate to 1.25%, the highest level in three decades. The yen weakened afterward, with the dollar briefly rising 1.3% against it, reaching a two-week peak of 158.05 yen. Despite these pressures, corporate earnings revisions have sustained stock gains, Slimmon noted, a shift from past years when Japanese and European equities frequently fell short of expectations.
Morgan Stanley’s strategy still includes U.S. stocks, but Slimmon cautioned about the market’s narrow focus. He suggested that stronger earnings could mitigate risks tied to heavy concentration among a few large companies. The firm’s perspective supports a broader insight: when earnings revisions align with stock movements, regional markets can produce surprising gains.
European companies in the banking sector have also strengthened their positions, with Vujcic emphasizing that the region’s financial institutions now compete effectively with U.S. rivals in key areas. However, he acknowledged that European banks still trail in overall scale and technological investment compared to their American counterparts.