Strategists believe the record highs reached by European stocks this week may represent the peak of investor gains for the year, despite it being only early March, according to a survey. The median forecast from 17 strategists suggests the Euro Stoxx 600 Index will finish 2026 roughly flat compared to Wednesday's historic closing high of 630 points. Analysts indicate that most of the tailwinds supporting the regional market have already materialized, while expectations for double-digit corporate earnings growth appear overly optimistic.
A positive note is that few strategists predict a significant downturn, as government spending and low interest rates are expected to bolster the European economy. HSBC Holdings remains the most bullish, with a target of 670 points implying nearly 7% upside potential. Only TFS Derivatives and Bank of America strategists foresee a risk of a 10% or greater decline.
Beata Manthey, Citigroup's Global and European Equity Strategy Chief, stated, "European equities have experienced a strong rally and are quickly approaching our year-end target. Concurrently, earnings-per-share revision trends remain negative, dragged down by internationally-focused stocks sensitive to the global economy and exchange rates. We are watching for signs of a broad-based EPS recovery. Currently, we strongly favor domestically-oriented stocks over international ones."
The Stoxx 600 Index has climbed more than 5% this year, building on last year's near 17% gain, significantly outperforming the S&P 500. The US benchmark has struggled as investors shift away from large-cap stocks towards other global markets and seek to avoid shares perceived as threatened by new AI tools.
However, eight consecutive months of gains for European stocks, coupled with steadily rising earnings forecasts, have pushed regional equity valuations to their highest level in over five years. The Stoxx 600's forward price-to-earnings ratio now nears 16x, compared to a 20-year average of 13.3x. Excluding bubble or recession periods, this approaches historically peak valuation levels.
Meanwhile, expectations for quarterly earnings, particularly in the second half of the year, have risen to a point where disappointment is a concern. Roland Kaloyan, a strategist at Societe Generale, commented, "We still see risks to double-digit profit growth expectations for 2026, especially in the second half. This could push the index slightly below current levels, particularly as the market is pricing in these high expectations with elevated valuation multiples." He characterized the latest earnings season as positive but not outstanding.
Sector rotation has recently been a clear strategy for investors. A barbell strategy, combining economically-sensitive industrial cyclicals with defensive stocks, has proven to be the correct mix so far. Commodity stocks have led gains, benefiting from a weaker US dollar and growing demand for metals crucial to the energy transition. Leading shares in utilities, telecommunications, and healthcare have also performed well. In contrast, non-essential consumer goods stocks, along with media and tech shares impacted by AI, have lagged. Overall, a strategy favoring domestically-focused stocks is no longer the sole source of returns, with exporter shares also performing decently.
Gerry Fowler, UBS Group's Head of European Equity Strategy, said, "The European market remains fragmented due to factors like exchange rates, tariffs, fiscal stimulus, and the enabling, adoption, and disruption from AI. Given such pronounced divergence in individual stock performance, index gains remain slow, but buying pressure from international investors continues to support index valuations."
European fund managers are more optimistic about the region than equity strategists. They appear convinced that substantial fiscal support, Germany's off-budget infrastructure fund, and increasing defense spending will drive profit growth. A Bank of America survey showed a net 35% of fund managers are overweight European stocks relative to global markets, up from 9% three months ago and nearing levels seen around the time of Germany's first fiscal stimulus package announcement a year ago.
Strategists, including Andreas Bruckner, wrote, "Investor bullishness on Europe's absolute performance has cooled, but 78% still expect further gains in the near term, and 89% anticipate gains over the next 12 months. These figures remain near recent historical highs."
Strategist Laurent Douillet noted, "Europe's Q4 earnings season mildly beat expectations—driven mainly by banks and pharmaceuticals—but the market reaction shows investors want visibility beyond small surprises. A sub-50% beat rate and harsh punishment for cautious guidance indicate EPS optimism is already priced in. Further earnings upside depends on margin resilience and management confidence, as exchange rates have replaced tariffs as the primary concern."
Christian Stocker of UniCredit is among those optimistic about the outlook but sees limited room for further gains this year. He stated, "We expect about 10% earnings growth for Stoxx 600 companies in 2026, supported by a gradual improvement in European GDP." His target for the benchmark is 630 points. He added, "The sectors expected to perform most strongly in 2026 will be basic resources, telecommunications, chemicals, and industrials. However, the tech sector may face pressure from disruptive distortions, and its performance will be more selective than in the past two years."
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