Why have French assets been weak for so long?

  • The yield spread between French and German 10-year government bonds has widened again, approaching historical highs, including those reached during the 2010–2012 European debt crisis. JPMorgan’s fixed-income team estimates that the spread is 55 basis points above the level implied by fundamentals, but this divergence could persist until the political and fiscal outlook becomes clearer.
  • The French government estimates that 43 billion euros in additional fiscal measures are needed to reduce the 2027 deficit to 5% of GDP. JPMorgan economists forecast a deficit of 5.2% in 2027, below their 5.4% forecast for 2026 but above the government’s target.
  • A fragmented parliament makes passing a budget difficult, and it is also uncertain whether a new government can advance fiscal consolidation after the presidential and parliamentary elections in spring 2027. JPMorgan therefore does not expect France simply to repeat the asset rally that followed Italy’s 2022 election, which produced a majority government able to govern in a unified manner.

French equities are cheap, so why distinguish between domestic and overseas businesses?

  • French equities have underperformed the broader European market for more than three consecutive years, and the CAC 40’s forward 12-month price-to-earnings ratio relative to the MSCI Eurozone Index has fallen to a historical low. Passage of a budget before year-end or support for a centrist candidate could improve sentiment.
  • But although stocks with a high share of French domestic business have significantly underperformed the CAC 40 in recent months, their relative performance for the year has merely returned to flat. Their valuations are not particularly cheap by historical standards, and earnings expectations do not fully reflect a pessimistic French macroeconomic scenario. French bank share prices likewise do not fully reflect the widening of government bond spreads.
  • JPMorgan believes domestically focused stocks could rally as sentiment recovers, but a sustained return to French exposure will be difficult before major event risks have passed. The bank maintains its preference for eurozone stocks with domestic businesses outside France over stocks focused on the French domestic market.

Where are the opportunities in overseas businesses and non-French banks?

  • About 76% of CAC 40 revenue comes from outside France. The index’s price performance relative to eurozone equities has diverged markedly from its relative earnings performance. JPMorgan believes that, under most reasonable scenarios, the gap is unlikely to be closed entirely through a decline in relative earnings.
  • French stocks with overseas businesses have also performed weakly relative to the broader market, but they are not cheap on a price-to-earnings basis. The bank expects this group to maintain its valuation premium if French risks do not spread to the rest of the eurozone and local economic momentum does not deteriorate significantly.
  • JPMorgan believes pressure in France is unlikely to continue spreading: compared with the European debt crisis, European banks have more capital, loan defaults are in better shape, and the European Central Bank has stronger tools to address contagion. The bank prefers non-French banks, noting that their earnings are still rising and their price-to-earnings ratios are around 8–9 times.

Why have falling bond yields not yet lifted equities across the board?

  • US and German government bond yields have recently fallen, and JPMorgan expects this trend to continue. The equal-weighted S&P 500 has rebounded relative to the market-cap-weighted index, and US value stocks have also recovered somewhat relative to growth stocks, indicating that the rally is beginning to broaden to more stocks.
  • The market still views a peak in yields as a risk-off signal that economic momentum has peaked, and defensive sectors may continue to outperform in the short term. The possibility of escalation involving Iran and Brent crude prices near their highs also mean investors need to see oil prices stabilize before increasing risk exposure.
  • JPMorgan believes the economic cycle is not yet over and leading indicators of earnings are still rising. If economic activity does not weaken materially, stable yields could ease valuation and financing pressures, allowing cyclical sectors to regain leadership on the strength of stronger earnings performance.