NextFin News - European equities have "done rather well" in the face of inflationary pressures and rising bond yields, but a further sharp selloff in government debt would leave stocks "vulnerable," Peter Oppenheimer, chief global equity strategist at Goldman Sachs, said in a television interview on September 30. The two-sided verdict captures the central tension in European markets: a profit story that is "still solid" is running alongside a sovereign-bond market that is repricing fiscal and inflation risk faster than the equity market is.
"Done rather well" in the face of rising yields, but "vulnerable" if the bond selloff deepens — that is the two-sided verdict Peter Oppenheimer, chief global equity strategist at Goldman Sachs, delivered on September 30.
The interview delivered a judgment that investors have been wrestling with all quarter. On one side stands the earnings backdrop. On the other stands the debt market. And the gap between the two is where the risk lives.
The macro pressure Oppenheimer referenced is concrete, not abstract. On September 10, the European Central Bank raised its three key interest rates by 25 basis points, lifting the deposit facility rate to 2.50%, the main refinancing rate to 2.65%, and the marginal lending rate to 2.90%, effective September 16. The Governing Council framed the move as a response to inflation pressures generated by the conflict in the Middle East, warning that inflation is set to remain "well above target for an extended period."
The numbers behind that warning are the point. Eurozone inflation ran at 3.3% in August, up from 2.9% in July and the highest reading since September 2023, with energy inflation surging to 14.3%. The ECB's own staff projections, released alongside the decision, see headline inflation averaging 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028, with core inflation (excluding energy and food) at 2.5%, 2.6%, and 2.3% over the same horizon. Growth, by contrast, is projected at just 0.9% for 2026.
Into that mix came France. On September 17, Prime Minister Sébastien Lecornu announced that the minority government would seek €54 billion in public-spending savings for the 2027 fiscal year, after acknowledging that the budget deficit would likely rise to 5.4% of GDP in 2026, up from 5.1% and the highest in the eurozone. Ten-year French OAT yields climbed above 4.5% in mid-September, their highest level since 2008. The finance ministry has projected national debt reaching a record 119.3% of GDP in 2026 and 121.7% in 2027.
Against that backdrop, European equities have not broken. The EURO STOXX 50 traded around 6,300 in the latest session, and the broader STOXX Europe 600 held near 639, roughly flat through a September in which the S&P 500 closed at 7,683.69 on September 28. The resilience is the story — but so is Oppenheimer's caveat, which is specific enough to be a testable claim rather than a hedge.
Why European Stocks Have Not Broken
The first question is mechanical: how do equities hold up when the risk-free rate that discounts their future cash flows is rising? The textbook answer is that they should not — at least not for long. Higher yields compress valuation multiples through the discount rate, and they make bonds a more credible competitor for the same pool of capital.
Goldman Sachs's answer is that the offset has come from the numerator, not the denominator. In its 2026 global equity outlook, the firm's strategy team — led by Oppenheimer — wrote that "returns in 2026 will be driven more by earnings growth than by rising valuations." That framing is doing real work. The firm forecast 5% earnings-per-share growth for STOXX Europe in 2026 and 7% in 2027, and in July it noted that consensus expected 11% year-over-year earnings growth for the STOXX 600 in the first half of 2026 — though that figure drops to 6% when commodity producers are stripped out.
This is the mechanism behind the resilience. When inflation runs at 3.3% and energy prices are elevated, commodity producers and companies with pricing power pass costs through. Nominal earnings grow with the price level. The equity market, in effect, has been acting as an inflation hedge on the earnings side even as the bond market reprices on the discount-rate side.
There is a catch, and it runs through the whole European story: concentration. The 11% headline earnings figure is being carried by a narrow slice of the index. Strip out commodities and the growth rate nearly halves. That is not a broad-based earnings boom; it is a sector-driven one. It explains why the market has held up at the index level while the average stock has had a more complicated experience.
The practical upshot: European equity resilience so far is an earnings phenomenon, not a multiple-expansion phenomenon. That matters because earnings resilience is durable only as long as the nominal growth impulse — energy prices, pricing power, global demand — persists. Multiple expansion, by contrast, would require the bond market to stand down.
Where the Vulnerability Really Lives
Oppenheimer's warning is not aimed at European equities in general. It is aimed at the bond market — specifically at the possibility of a "further sharp bond selloff." That distinction is the key to reading the comment correctly. Europe does not have one bond market; it has twenty, and the stress is not evenly distributed.
The transmission channel from sovereign yields to equities runs through three routes. First, the discount rate: a higher risk-free rate lowers the present value of future earnings, hitting long-duration growth stocks hardest. Second, the equity risk premium: when a 10-year government bond yields 4.6%, equities must offer a materially higher expected return to compete, which forces a price adjustment. Third, the real-economy channel: higher sovereign borrowing costs feed into corporate funding costs and, eventually, demand.
France is where all three routes converge. A 10-year OAT yield above 4.5% is not just a number; it is the highest level in 18 years for a G7 economy that is supposed to sit at the core of the euro area. The OAT-Bund spread — the premium investors demand to hold French debt over German debt — stood at 105.4 basis points on September 25, with the 10-year OAT yielding 4.63% against 3.58% for the German Bund. That spread has ranged between 59 and 110 basis points over the past year and averages around 74.
Here is the uncomfortable detail for the benign case: the market is already pricing more French stress than the consensus bank forecast. A major bank's published year-end 2026 forecast calls for the OAT-Bund spread to settle near 75 basis points — essentially the historical average. The actual spread is running roughly 30 basis points above that. The bond market, in other words, is not waiting for the political risk to resolve; it is charging for it now.
The politics are part of the risk premium. French administrations were ousted in no-confidence votes in December 2024 and September 2025, and the 2026 budget was passed only in February via a constitutional clause allowing the government to bypass parliament. A minority government attempting €54 billion of spending cuts ahead of a presidential election in the spring is, by any measure, a fragile setup.
So why has the equity market not broken already? Because the bond selloff has been contained to the periphery of the euro-area complex — France, primarily — rather than becoming a broad repricing of the euro-area risk-free curve. German Bund yields have risen, but they have not spiked. The ECB's deposit rate at 2.50% still provides a policy anchor. As long as the stress is idiosyncratic rather than systemic, European equities can compartmentalize it. The moment a French funding problem starts to look like a euro-area funding problem, that compartmentalization fails — and that is the scenario Oppenheimer's "vulnerable" comment is flagging.
Cyclical Resilience or Structural Discount?
The deeper question is whether Europe's ability to hold up is cyclical — a temporary earnings wave that will mean-revert — or whether it signals the start of a structural re-rating of European equities relative to the United States.
The evidence points to cyclical resilience sitting on top of a structural discount, and the two should not be confused.
The cyclical leg is the earnings wave described above: elevated energy prices, pricing power, and a global economy that has not tipped into recession. That leg is mean-reverting by construction. When energy inflation normalizes and the ECB's projected 2.1% inflation for 2028 arrives, the nominal earnings tailwind fades. A cyclical call needs evidence of mean reversion, and here it is built into the central bank's own forecast path.
The structural leg is the valuation discount, and it is real. The S&P 500's technology weight sits at roughly 45%, compared with about 9.5% for the STOXX Europe 600. The seven largest S&P 500 companies account for about a third of that index's weight, versus 14% for the STOXX 600. Europe simply does not own the assets that have driven the last decade of global equity returns.
But here is the counter-intuitive part: that structural discount is exactly why Europe has kept pace. In the first half of 2026, European equities tracked the S&P 500's return despite carrying a fraction of the technology weight — because the concentration that lifted the US index also made it vulnerable to a narrow set of drivers, while Europe's breadth and its exposure to AI infrastructure beneficiaries provided an alternative route to participation. In July, Oppenheimer pointed to STMicroelectronics, which had risen roughly 190% year-to-date at that point after guiding datacenter revenue to "nicely above $500 million for 2026 and well above $1 billion for 2027" on a multi-year engagement with AWS, and to Infineon Technologies, the German power-chip maker, up about 115%.
The structural discount will not close on its own. It requires something Europe has not had: deeper capital-market integration, cheaper energy, or a productivity breakthrough. Goldman Sachs's own scenario analysis makes this explicit — in an upside case with greater European integration and an AI-driven productivity boost, annualized returns could exceed 10%, versus a base case of roughly 7% in euro terms.
The judgment: the resilience is cyclical and earnings-driven; the discount is structural and persistent. Investors who treat the recent holding pattern as the start of a structural re-rating are likely to be disappointed. Investors who treat it as a cyclical earnings story with a bond-market tripwire are reading it correctly.
The Counter-Thesis: France Is the Canary, Not the Exception
The strongest case against the resilience view is that France is not an idiosyncratic problem but a leading indicator for the euro area. The argument runs as follows: a 5.4% deficit and debt above 119% of GDP in the eurozone's second-largest economy is not containable through spending cuts alone, especially under a minority government facing an election. If French funding costs remain elevated, the stress spreads — to Italian spreads, to the banking system's sovereign holdings, to the ECB's policy reaction function. In that world, "resilient" equities are simply the last thing to reprice before a broader credit event.
This is a serious argument, and it is not a strawman. It is backed by the observable fact that euro-area fiscal rules have repeatedly failed to constrain the largest deficit spenders, and by the political reality that austerity ahead of an election is the least stable form of fiscal consolidation. The market has already voted with the spread: at 105 basis points, investors are not pricing a temporary French wobble.
The answer is twofold. First, the ECB's projections still show growth of 0.9% in 2026 — weak, but not recessionary. A soft landing, even a shallow one, gives fiscal consolidation a chance to work without a debt spiral. Second, the equity market's earnings cushion is real: at 5% to 7% EPS growth, European companies are generating nominal profits growth that exceeds nominal GDP growth. That is not a market begging for a de-rating.
But the counter-thesis has a clear falsifying line, and it sits above current levels. The resilience view breaks if 10-year OAT yields sustain above 5.0% and the OAT-Bund spread widens beyond 120 basis points for an extended period. Neither threshold has been hit — yields sit near 4.6% and the spread near 105 — but both are within striking distance. Those are the levels at which an idiosyncratic French problem becomes a systemic euro-area funding question. Below them, the compartmentalization holds. Above them, Oppenheimer's "vulnerable" caveat moves from risk management to risk realization.
Conclusion: The Profits Are Cyclical; the Bond Market Is the Test
What does this mean for the road ahead? The impact is asymmetric, and it splits by time horizon.
In the short term, bond volatility is the dominant driver. Any escalation in French political risk or a fresh energy-price spike from the Middle East conflict pushes yields higher and tests the equity market's tolerance. The exposed groups are clear: long-duration growth stocks, French domestic cyclicals, and utilities carrying heavy balance sheets. The beneficiaries of contained stress are the exporters with dollar-denominated revenue and the AI infrastructure supply chain — the semiconductor capital-equipment and power-chip names that participate in global capex cycles rather than European fiscal cycles.
Over the medium term, the story is earnings delivery. The base case is that consensus earnings growth materializes, the ECB's projected inflation path holds, and European equities grind modestly higher on profits rather than multiple expansion. The upside case requires the bond market to stand down — OAT yields back below 4% and the OAT-Bund spread narrowing toward 50 basis points — which would allow the structural discount to narrow and could deliver low-double-digit returns. The downside case is the one Oppenheimer flagged: a further sharp bond selloff that turns equity vulnerability into an actual drawdown.
Over the long term, the structural discount persists unless Europe delivers on integration, energy-cost reduction, or productivity. Without one of those three, European equities remain a cyclical, value-oriented allocation — not a structural growth engine.
The signal to watch is the one that would prove the resilience thesis wrong: 10-year OAT yields holding above 5.0% alongside an OAT-Bund spread above 120 basis points. That combination would mark the transition from contained fiscal stress to systemic repricing.
Europe's equity market has earned its resilience through earnings, not through multiple expansion, and that distinction is what makes it both real and fragile. The profits are cyclical; the bond market is the test.
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