December – and Q4 as a whole – were strong for European equity markets, although 2025 proved challenging for many active managers.
What tripped up a lot of managers was a continued bias towards “quality growth” stocks.
and underweight positioning in the banking sector. We have been arguing for the last five years that “quality growth” was overvalued, and 2025 was the year that the chickens really came home to roost for that factor grouping. It was also an extraordinary year for the banking sector, which provided a more than 77% total shareholder return.
Banks vs benchmark: Performance of European banking sector vs the market.
Security | Currency | Price Change | Total Return | Difference |
|---|---|---|---|---|
SX7P Index (STOXX Europe 600 Banks index) | EUR | 67.83% | 77.62% | 58.89% |
MSCI Europe Net Total Return Index | EUR | 18.74% | 18.74% | — |
Source: Bloomberg, as at 3.1.2026. Date range is 2.1.25-30.12.25. Past performance is not an indicator of future returns.
Figure 2 makes an intriguing point, illustrating how closely the outperformance of “quality’’ as a style/factor was linked to falling bond yields over the 2018–2021 period. At the time, we argued that equity markets were endogenizing ever-lower bond yields into the valuations of stocks with certain characteristics. On a fundamental basis, many “quality growth” stocks such as RELX, Sika and Givaudan, appeared significantly overvalued. It took time for this view to be reflected in stock prices once bond yields began to rise, but when it eventually did -- particularly in 2025 -- the adjustment was brutal. What is notable is that it was real interest rates, rather than nominal rates, that appeared to drive this derating. This suggests that the reversal of quantitative easing, rather than rising inflation, was the primary factor behind the reversal in the q quality factor trend.
Figure 2: Relative performance of European quality vs. real German bond yields
Questions worth asking at this point are whether the banking sector still justifies an overweight position, and whether any quality stocks are particularly attractive in valuation terms. Here are our thoughts:
- Banks. We have reduced the strategy’s overweight position across Spanish and Italian banks but remain overweight overall. The sector aggregate Price to Earnings Relative (PER) multiple is probably as good as any metric in gauging overall sector valuation, and this currently trades at 0.68x which is below both the 25-year average (0.76x) and a ‘normal times’ range of 0.8-0.9x.1 The sector continues to see strong earnings momentum, volume growth is returning -- especially in southern/eastern Europe -- and cash generation is prodigious at current Return on Equity levels. Capital returns to shareholders are also attractive, with dividends and buybacks typically offering a 7–8% yield. The sector is likely to benefit from further automation -- with the application of AI layered onto headcount reductions and excess branch closures (especially in southern Europe). What is interesting about the sector is how the relative performance troughed at the same time that quality growth peaked, reinforcing once again the central impact of QE in distorting intra-stock market valuations.
- Quality Growth. The assessment is ultimately stock-specific, but in aggregate our view remains “not yet.” Quality as a factor screens fair value rather than cheap, and once established, factor trends often persist for extended periods. At present we do not find any of the stocks that might otherwise be attractive from a fundamental perspective to be compelling on valuation grounds. A caveat is that some stocks typically thought of as “quality growth” were also caught up in another factor basket trade of “AI losers.” We are much more sceptical about this concept being applied to stocks like Relx, LSEG and SAP. Whilst we are alive to the risks as well as the opportunities of the application of AI to all businesses, we believe these businesses have deep moats based on proprietary data and business processes that should get stronger in an AI world, not weaker. A pre-requisite for applying AI effectively in any enterprise is high quality proprietary data that is well structured.
Nevertheless, European equity markets are more than just banks and ‘quality’ and there are some other interesting thematics to discuss. Of particular note is AI/Tech -- Europe does not possess the mega-cap hyper-scalers of the US market or the key drivers of the AI innovation, but European markets do host some very strong enablers of the AI rollout, and so the “AI thematic’’ tends to play out through semiconductor capex and electrical equipment stocks. These stocks have had strong price appreciation over recent years -- but 2025 brought a much more muted stock return with a poor H1 followed by a strong rally into H2 for certain stocks (ASML and Prysmian).
We continue to believe that these companies will experience strong multi-year revenue and earnings growth as hyper-scalers build out capabilities, driving both strong demand for leading edge semiconductors and an inflection in developed-market electricity demand (layered on top of the implications of the energy transition); all of this plays to the need for the capital equipment that allows this to happen -- a view that has come back into focus in early 2026.
What are the risks of AI investment proving to be a bubble, followed by a crash? We don’t want to add to the reams of commentary on this topic but observe that for the next few years at least, the demand for semiconductor equipment (ASML, ASM International) will be very strong, whilst electrification is driven by the needs of the energy transition as well as data centre demand and this is a multi-year demand driver. The geopolitical competition between the US and China is witnessing both countries invest significant portions of their industrial might into winning the AI race. Valuations in these sectors are elevated but not extreme, and this is something we will continue to monitor. The sub-sectors remain attractive, but the strategy will adjust positioning through time.
The consumer parts of the market are another area worth discussing. The global picture on the consumer is relatively tough and somewhat confusing, which impacts our conviction levels:
- The US has a ‘k’ shaped consumer economy, with higher/highest income deciles seeing income and particularly wealth growth and lower income growth face real income squeezes. This is tough for many areas of staples but good for luxury.
- European and Chinese consumers are exhibiting considerable caution with higher-than-normal savings rates – tough for most areas of the consumer sector.
- Layered on top of this are ‘mooted’ long- term structural trends such as rising GLP1 penetration, abstemious (non- alcohol consuming) young adults and demographics. This is bad for many staples.
- Within Luxury, the strong income & wealth growth of high-income US consumers knocks into the more cautious European and Chinese consumer as well as the demand consequence of many years of pricing growth taking the product too far away from the mere affluent consumer.
The strategy holds several high-conviction positions within the consumer sector where we believe a combination of strong business models and attractive valuations should support continued outperformance. Alongside these, within the strategy we have added selective exposure to turnaround situations. These are becoming more prevalent within consumer staples, a segment facing structural and cyclical headwinds, therefore continued ownership will be contingent on delivery against improving fundamentals. For luxury names we remain in wait-and-see mode.
In conclusion, the wide dispersion in operational and share price performance across European equities highlights the need for a flexible and selective investment approach, with a strong focus on risk awareness in portfolio construction.
Strategy risks
Currency (FX) Risk - The strategy can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
Share Class Hedging Risk - The share class hedging process can cause the value of investments to fall due to market movements, rebalancing considerations and, in extreme circumstances, default by the counterparty providing the hedging contract.
Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
Market Concentration Risk (Geographical Region/Country) - Investing in a particular country or geographic region can cause the value of this investment to rise or fall more relative to investments whose focus is spread more globally in nature.
Derivative risk - the strategy may use derivatives to reduce costs and/or the overall risk of the strategy (this is also known as Efficient Portfolio Management or "EPM"). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the strategy.
Liquidity Risk (general) - During difficult market conditions there may not be enough investors to buy and sell certain investments. This may have an impact on the value of the strategy.
Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the strategy’s assets.
Footnotes
1Bloomberg, as at 3.1.2026
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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Important Information: This is a marketing communication. This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Past performance is no guide to the future. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Company or holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI.