What's Happening?
Deutsche Bank has upgraded its stance on European equities from neutral to positive, citing cheaper valuations, higher diversification, and a strong fiscal impulse as key factors. The bank projects gains of up to 16% across major European indices in 2026, with sectors such as autos, energy, and materials contributing positively to index-level earnings growth. The Stoxx 600 could see up to 12% earnings growth in 2026. UBS is also forecasting annualized returns of 10% for the Stoxx 600. Deutsche Bank's upgrade follows a downgrade in July, and the bank is particularly bullish on its home market as spending picks up pace following the approval of the 2025 budget.
Why It's Important?
The upgrade by Deutsche Bank signals a potential shift in investment focus from U.S. equities to European markets, which have been underperforming for 15 years. This could lead to increased capital inflows into European stocks, benefiting sectors like autos, energy, and materials. The forecasted growth in European equities may attract investors looking for opportunities outside the U.S., especially as valuations in Europe are considered undemanding. This shift could impact U.S. markets, as investors reallocate funds, potentially affecting stock prices and market dynamics.
What's Next?
Deutsche Bank expects the European equity market to continue its upward trajectory until the end of the year, driven by domestic market opportunities less exposed to tariff and currency volatility. The bank anticipates further spending in Germany, particularly in defense, which could boost European manufacturers. Political volatility in France may create short-term uncertainty, but global economic factors are expected to have a more significant influence on French stocks. The bank remains constructive on equity markets, predicting a 14% upside for the CAC until the end of 2026.
Beyond the Headlines
The shift in focus to European equities highlights underlying shifts in valuations, debt levels, market concentration, and risk profiles, paving the way for a potential resurgence in European equity appeal. This development could lead to long-term changes in investment strategies, as investors seek diversification and growth opportunities in less volatile markets.
