It is at this moment when the better opportunities: los markets they remain affordablelas ratings they start to rise and the growth margin remains high as profits have not yet recovered. As long as the recovery expectationswe believe that the European equities continues to offer significant upside potential.
However, it is required patiencesince recovery rarely follows a linear path. In the current case, the recovery is occurring in three phases.
Stock markets and politics have different rhythms
The almost simultaneous announcements of the ‘Re-Arm Europe’ plans and the German ‘Bazooka’ caused a strong wind of optimism throughout Europe at the beginning of 2025. The stock market reacted immediately: in a few weeks, Eurozone equities soared by almost 20%, supported by the strongest flows in the last ten years. But markets and politics do not share the same rhythm.
The first ran out of momentum after the announcements. The contrast between investor enthusiasm and the real pace of the economy became evident. By understanding that corporate profits would not grow in 2025due to a weak dollar and disruptions caused by US tariffs, markets continued to rise, although showing signs of frustration with the limited effects of the announced multi-year plans.
Now we have entered the rslower pace of politics. Although the agenda cannot be completely controlled, each stage of implementation will be welcomed. The first steps in European efforts to regain control are already visible. The 50% reduction in steel import quotas, along with additional tariffs, should support the European steel industry from 2026. Current talks to delay the ban on combustion engines would ease pressure on the automotive sector. Progress on the SIU* could also become a powerful catalyst for the European financial ecosystem.
In Germanythe defense and infrastructure spending plan, close to 1,000,000 million euros, marks the beginning of a new paradigm. After decades of underinvestment, public administration is undersized: The first effects will begin in 2026 in defense, but probably not before 2027 in infrastructure.
Meanwhile, The Government’s supply policy can also rely on the private sector: Within the “Made for Germany” initiative, 105 companies have collectively committed €735 billion in investments over three years, taking advantage of the fiscal boost announced by the Government (accelerated depreciation options already in force and tax cuts from 2028).
In this sense, it was logical that 2025 will not reflect recovery. The results of the stock markets of the Eurozonewith an increase of approximately 20% in 2025 (after +30% accumulated in 2023 and 2024), are mainly explained by a revaluation of shares. In 2026performance will depend on the recovery of corporate profits.
2026: time for entrepreneurs to act
He profit growthcombined with a shareholder return (dividends and share buybacks) of around 4-5%, should continue to boost equity markets in 2026. Several forces will drive the earnings recovery.
He motor fiscal (mainly in Germany) will not, in our opinion, be the main driver, although it could act as a catalyst in the event of new reforms. Some sectors, such as defense, IT services (public spending to boost digitalization) or steelshould be the first to benefit from support measures in 2026; However, most of the impact is expected from 2027 onwards.
The macroeconomic driver will be more relevant in the Eurozone. Economic surprises are positive; PMIs are approaching the gradual transmission of ECB rate cuts. In this sense, several European construction markets are already showing signs of an early turning point.
After three years of stagnant profits, profits are expected to grow by 11% in Europe and 14% in the Eurozone, according to the consensus of economists. Although the magnitude of the increase is likely more moderate, this growth scenario appears realistic considering the multiple levers at play. All sectors should see their profits grow, which is quite exceptional.
Sectors related to electrification (industry, utilities, services and engineering) will continue to enjoy strong momentumstimulated by the need to modernize electrical networks. The increase in defense spending will benefit both specialized players and their more diversified subcontractors (steel, engines, infrastructure).
Several sectors are heading towards a rebound in their volumes thanks to a favorable comparison base and/or the end of inventory reductions following the post-pandemic recovery (healthcare, semiconductors). The operating lever will be importantespecially in industry, construction and materials. In addition, the negative implications derived from the decline in the dollar and tariffs should begin to fade, supporting export companies.
Lastly, the benefits of the financial sector should remain on a positive trajectory in an environment of stabilized rates and increasing credit volumes.
Take advantage of different rhythms
Today, the Eurozone benefits from double monetary and fiscal support; However, the gradual implementation of the aforementioned plans creates a time lag that investors can take advantage of through rigorous stock selection. Beneath the surface of the indices, the dispersion of values is high and it will be important to identify reasonably valued stocks with good prospects (the aeronautical industry, for example, benefits from very long orders, improved supply chains and has not taken on heavy new investments), take advantage of the waves of increasing volumes when they occur in cyclical sectors and identify any current valuation errors.
We have identified undervaluations evident in quality actions that are being ignored in favor of high beta stocks. The relative valuation The market has reached a 15-year low, surpassing the threshold of two standard deviations below its historical mean, which often signals a reversion towards the mean. These actions include companies of healthcare and software, IT services or advertising agencieswho tend to present themselves as losers of the AI. When its earnings gradually confirm its strength, a revaluation is likely.
Las Eurozone Small Caps They also offer a set of attractive opportunities: profit growth in small companies exceeds that of large ones; They are trading at a relative discount of 15% (versus a historical premium of 22%) and will be the first to benefit from a domestic recovery. Historically, Small Caps have outperformed large caps in periods of economic recovery in Europa. Furthermore, the sectoral diversity Within this universe of specialized actors, it allows investors to expose themselves to both national and sovereign opportunities with tailwinds, as well as innovative companies with international projection.
Conclusion
An even more positive scenario would emerge if a peace agreement was reached in Ukraine. (lower energy prices and reduced risk premium, reconstruction plans). However, there are still uncertainties about the political agenda (United States, France…), the pace of Chinathe US dollar, tariffs and of course the AI cycle in USA. In the latter case, a possible change in trend would lead to depolarization and rebalancing of global asset allocations, which would be positive for Europawhere fundamentals are strengthening and relative valuations remain attractive.
In summary, Europe is on the move and it would be a mistake to leave the dance floor before the pace picks up..
Key points
- After the latest news and the period of uncertainty, the time of implementation.
- In 2026markets will be driven by profit growth.
- Investors should take advantage of the finfravaluation hollows in quality stocks or Small Caps.