Europe Weekly Kickstart Higher rates, resilient earnings

Portfolio Strategy Research 18 September 2026 | 12:47PM BST

Higher rates, resilient earnings

Higher rates are forcing investors to rethink the outlook TTF gas prices are near three-year highs and sovereign Guillaume Jaisson | for equities. Over the last weeks, almost every key macro spreads remain wide. Despite this, the STOXX 600 is down Goldman Sachs International forecast has moved in the same direction. Energy prices around just 3% from its peak. We think the reason for this is Peter Oppenheimer have risen sharply following further disruption in the Middle that earnings remain strong, balance sheets remain healthy | East, central banks have turned more hawkish, bond yields (Exhibit 3) and investors continue to view the current Goldman Sachs International

have repriced higher and markets now discount an environment as one of resilient growth rather than Sharon Bell | additional 25bp of tightening by end-1Q27 from both the impending recession. The rise in bond yields has largely Goldman Sachs International Fed and ECB (vs. the start of September). Our rates team been absorbed by a lower ERP, a trend we have highlighted Elena Porfidia | now forecasts US and German 10-year yields at 4.75% and here in Exhibit 34. What matters for equities is not simply Goldman Sachs International 3.25% (significantly higher than their previous forecast) by the level of yields, but the speed, source and relative year-end. What does this mean for European equities? valuation (Exhibit 4). Historically, when bond yields move Jacinta Feng | more than 1.5 standard deviations over a month (roughly Goldman Sachs International Equities are feeling the pressure from higher yields. The 20bp at the moment), equities tend to underperform underlying relationship between equities and interest rates (Exhibit 5). Over the past month, US 10-year yields have has rarely been as important, or as negative, as it is today risen beyond this threshold. (Exhibit 1). Since the start of the latest Middle East conflict, a 10bp rise in US 10-year yields has corresponded to roughly a Higher energy prices are a bigger problem for the 1.0% fall in the STOXX 600, while a similar move in German economy than for the stock market. This is another Bund yields has been associated with around a 1.2% decline. example of why ‘European equities are not the European The sectors most exposed are Real Estate and economy‘. STOXX 600 earnings have historically been consumer-related businesses, where the sensitivity is positively correlated with energy prices. Our multivariate roughly 1.5x that of the broader market (Exhibit 2). earnings model helps quantify this relationship. Based on data since 1990, the model suggests that a 10% increase in Yet European equities have been resilient. US Treasury Brent oil prices is associated with around 2.4pp higher yields are close to 5%, Brent has traded above $100/bbl,

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Goldman Sachs Europe Weekly Kickstart

STOXX 600 earnings growth, with most of the benefit concentrated in commodity-related sectors (Exhibit 6). Utilities, Financials and parts of Chemicals can also benefit from higher inflation, better pricing power and higher rates. Since the start of the latest energy shock, Energy sector EPS estimates have risen by more than 80%, while Financials, Utilities and Chemicals have also seen upgrades. By contrast, the impact on Telecoms, Media and Healthcare is limited. Consumer Discretionary remains the clearest loser.

Valuations leave limited room for disappointment, but they do not look excessive. The STOXX 600 trades on around 14.2x forward earnings, broadly in line with its long-term average. This is roughly 5% above our fair-value model (Exhibit 7), but consistent with our constructive base-case scenario of resilient global growth, easing inflation and stable sovereign spreads. Europe remains significantly cheaper than the US (particularly on a FCF yield basis). So, in our view, it does not look obviously expensive given the earnings backdrop: consensus expects…