European stocks have had a good year so far. The benchmark Stoxx 600 is up about 7% since the start of 2023 – its strongest start in more than 26 years, according to Bernstein’s analysis. That’s better than the S&P 500, which returned 5.8% over the same period. While the underperformance has been modest, the outlook for US stocks is certainly more muted – Wall Street is still wary of a recession. European stocks are therefore worth looking at in the near future, according to Bernstein, who expects more upside for them. “We think there is still moderate value. The region is still sold at a discount to several historical averages, in absolute and relative terms. Still lower than usual vs. the US,” Bernstein analysts, led by Sarah McCarthy, wrote in a note on January 24. The bank added that there is more room for “positive earnings surprises” in Europe than in the United States, given lower earnings expectations for the former. On top of that, share buyback yields are higher in Europe than the US for the first time ever, according to Bernstein. Stock Pick One of the top Bernstein plays low leverage stocks, which the bank defines as stocks with a low net debt to equity ratio. “Our macro analysis shows that European low leverage can outperform when leading indicators predict a recession and also when interest rates rise, as is the case today,” wrote Bernstein strategist Mark Diver on January 19, adding that low leveraged stocks have outperformed the annual average 8.7% in the last European recession, he added. The top choices in this bank are Publicis Group, LVMH Moet Hennessy, L’Oréal, Equinor and Airbus. Barclays is also “tactically overweight” in Europe compared to the US because it considers the region’s stocks to be under-owned and cheap. It named seven “conviction stock ideas with catalysts” in the coming quarter, which it said have the potential to average up 25%. Finnish oil refiner Neste makes the list of banks, given the bank’s view of the global shortage of renewable diesel to support product prices until at least 2024. Barclays also likes German energy firm RWE for “undervalued” renewables pipeline growth. “We believe investors are facing the transformation of RWE into Europe’s third largest renewables player, especially related to the renewables growth pipeline,” Barclays analyst Rob Bate wrote on January 20. Also making the Barclays list is Telefonica Deutschland. The bank said it believes the company can deliver low-to-mid single-digit revenue growth that will translate into rising free cashflow, which in turn will support the company’s dividend payments. Morgan Stanley named several stocks to buy ahead of the anticipated earnings season in Europe. They include Universal Music Group, whose share price the bank expects to rally into the earnings season, as well as French hospitality group Accor, which Morgan Stanley expects to post a strong fourth quarter and beat consensus estimates. Other options include SAP, Teleperformance and Elis. Bank of America has several European options with exposure to higher Chinese consumer spending and increasing overall demand due to China’s reopening. Dutch tech investment group Prosus NV gets 80% of its revenue from China, giving it the highest sales exposure by a mile, according to Bank of America. Other stocks with more than 30% revenue exposure to China include BMW, Standard Chartered, HSBC, Infineon Technologies, Porsche and Swatch. – CNBC’s Michael Bloom contributed reporting