European Stock Markets: Market Outlook for 2026

■ Expectations of high profit growth driven by AI-related technologies are unlikely to intensify further, and overall valuation pressure is not significant.  
■ The economic stimulus from fiscal expansion and recovery funds in various countries will continue, and the upward trend in the stock market is expected to persist. 
 
In 2025, the STOXX Europe 600 index gradually recovered after a significant spring correction and reached a new historical high. Against the backdrop of high valuations in US stocks, investment funds flowed into European stocks, supported by expectations of expanded investment in defense and infrastructure. The index rose steadily from around 500 points at the beginning of the year to 557 points at the end of February, setting a new high. Subsequently, amid fluctuating US government tariff policies, mutual tariffs were officially launched in April, and China took retaliatory measures, causing the index to plummet to around 460 points. Afterward, a consensus gradually formed in the market that the extreme policies proposed by the US government would ultimately be difficult to fully implement; coupled with the trade agreement reached between the US and Europe in late July, the index once again showed a trend of challenging historical highs after August. Germany completed its 2026 budget, clearly expressing a positive attitude towards defense and infrastructure investment, further boosting market sentiment. On the 19th, the index rose to 587 points, a new all-time high. As of the 22nd, the year-to-date increase was 15.6%, lower than Japan (TOPIX 22.2%), but close to the US (S&P 500 17.0%). 
 
According to statistics from financial information company LSEG I/B/E/S (as of the 16th), the 2026 earnings per share (EPS) of the index's constituent stocks are expected to increase by 11.8% year-on-year. In terms of industry contribution, sectors that are more likely to benefit from defense and infrastructure investment, such as consumer staples (3.6%) and capital goods and services (1.7%), as well as the financial sector (3.3%), which benefits from rising interest rates driven by fiscal expansion, are expected to be the main drivers. Furthermore, the European Commission's proposal to withdraw its target of "banning the sale of new gasoline-powered cars in principle by 2035" is expected to be a positive factor for European automakers under pressure from US tariffs. On the other hand, despite high expectations for profit growth globally, the information technology (IT, 0.7%) sector has limited impact on the overall index, making it difficult for AI-related benefits to significantly boost the price-to-earnings ratio (PER). Therefore, the expected PER for the next year is 14.6 times, only slightly higher than the average level since 2018 (14.1 times), and the overall valuation does not appear too high. 
 
The German Federal Parliament (lower house) has passed the budget for fiscal year 2026 (January-December 2026), and it is expected to be approved by the upper house soon. The budget expenditure is €524.5 billion, an increase of about 4% over the previous year, with defense spending reaching its largest level since the end of the Cold War. While the market may have already partially priced in the profit growth of related sectors, the EU recovery fund, which began operating in 2021, has a withdrawal deadline set for the end of 2026 and is expected to continue supporting the economies of Southern European countries such as Spain. Fiscal expansion is expected to provide a floor for the index, thus the target for the index at the end of 2026 is projected to be 620 points, with potential upside to 640 points. It should be noted that if Russia and Ukraine reach a ceasefire agreement, the demand for post-war reconstruction could fundamentally change the investment landscape of European stock markets, and these warrants continued monitoring.