How to Position as France Enters a New Political Cycle

French assets are set to contend with an extended stretch of political and fiscal instability in the run-up to the 2027 presidential election, and Goldman Sachs warns that investors should remain cautious even as valuations become progressively cheaper.

France is moving into a fresh political era, with Marine Le Pen topping first-round polls above 30%, ahead of centrist Édouard Philippe and far-left candidate Jean-Luc Mélenchon, both in the 15%-20% range. Goldman Sachs’ economists give Le Pen a 68% probability of victory, while prediction markets place her odds at about 30%.

For markets, though, the larger concern is France’s fiscal credibility rather than the identity of its next president. Public debt is nearing 120% of gross domestic product, the fiscal deficit remains above 5%, and a fragmented parliament could make it difficult for the incoming government to deliver the spending cuts or reforms needed to stabilise debt. French 10-year government bond yields have risen to 4.2%, their highest level since 2008, according to Goldman Sachs.

The yield gap between French and German 10-year government bonds—known as the OAT-Bund spread—has already widened beyond 80 basis points. Goldman Sachs expects the spread to stabilise around 70 basis points while treating 100 basis points as a reasonable stress scenario. The bank says it would grow more interested in French assets if the spread moved closer to 100 basis points, which would signal excessive pessimism relative to fundamentals.

French equities have already absorbed a sizeable share of political risk. The CAC 40 has been Europe’s weakest major large-cap index in 2024, 2025 and 2026, underperforming the STOXX 600 by 7.8%, 5.2% and 6.8%, respectively. Goldman Sachs attributes this weakness not just to sector composition, but also to investors applying a distinct political and fiscal risk premium to French stocks.

Yet the CAC 40 is not a direct reflection of the French economy. Only about 15% of its constituents’ revenue is generated in France, limiting the immediate effects of domestic political events. In contrast, Goldman Sachs’ France Domestic basket draws roughly half of its revenue from France and is more exposed to sectors such as industrials, financials, real estate and consumer discretionary.

This contrast could become increasingly important as the election nears. Goldman Sachs estimates that a 10-basis-point widening in the OAT-Bund spread has historically coincided with a roughly 3% decline in the CAC 40 and a 4% decline in its France Domestic basket.

Valuations have become cheaper, but not enough to entice Goldman Sachs back into French equities. Domestic French stocks trade at nearly 10 times forward earnings, about 35% below the broader European market, yet the bank argues that political uncertainty and domestic stocks’ sensitivity to sovereign spreads could justify a discount more than 10 percentage points deeper than current levels.

French banks remain the highest-beta equity exposure to political risk. They trade at about eight times forward earnings, a roughly 25% discount to European peers, but wider sovereign spreads could raise funding costs, increase the cost of equity and revive concerns about taxation and regulation. Goldman Sachs notes that French banks have nonetheless gained about 140% since January 2022, leaving less room for further rerating without greater political clarity.

Taxation adds another headwind. Repeated extensions of France’s temporary corporate surtax have lifted effective tax rates to around 30% for companies with more than €1 billion in turnover and about 35% for those above €3 billion. Goldman Sachs estimates the measures reduce earnings by roughly 2 percentage points for the CAC 40 and 4.5 percentage points for its France Domestic basket.

Foreign investor positioning also offers less protection than in the past. Over the previous year, international investors have increased their allocations to Europe and France and are no longer materially underweight, meaning a rise in political risk could slow or reverse inflows and further widen France’s discount.

Goldman Sachs does not expect a systemic crisis or a broad earnings shock, citing stronger European institutional backstops and the Rassemblement National’s abandonment of its earlier anti-euro position. Still, it sees French risk premia remaining elevated through the entire election cycle and the annual budget debates.

In periods of weakness, the bank says it prefers French bonds over domestic French equities, and it also favours German equities, where earnings could benefit from the country’s fiscal and investment programme.