Fund managers appear positive for stock market performance next year – despite the record-breaking heights reached in 2025 and the three years of buoyancy already from many indices, and despite high valuations and concentration risk in US technology companies.
Driving this bullishness, at least in part, are perceptions that inflation is roughly under control and that benign interest rates will aid the economic and business environment globally.
In the plethora of 2026 investment outlooks published at this time of year, opinions on US stocks vary – though never fully turn sour. The AI bull market is expected to continue.
However, the increasing weight of tech stocks and broader US names in global equity portfolios has led to calls for greater diversification and there is a view that the return landscape is shifting, with emerging market (EM) stocks – and Asia in particular – expected to outperform thanks to a softer US dollar, lower rates and Asia’s own AI capability.
Where does Europe fit in with expectations for equity markets in 2026? The answer is… somewhere, at least.
Take one selected quote from HSBC Asset Management: “We expect the following to outperform the MSCI World Index: mid-sized domestic companies and value-oriented stocks in Europe, growth stocks in the US and, above all, emerging markets.”
This pretty much sums up the outlook: continued bull market in the US, a shifting of weight to Asia, and at least something for Europe.
Watching Germany
Europe’s STOXX 600 index was among those setting record highs in 2025. It was the prospect of fiscal expansion that “stoked the fires of interest” in European equities during 2025, says Neil Robson, head of global equities at Columbia Threadneedle Investments.
This fiscal backdrop, which is highlighted by many commentators, tends to centre most of all on a €500 billion bout of spending by the German government on infrastructure, which could boost German GDP and impact the wider EU. Germany had to change its laws to get the plan in motion and there has been frustration at the speed of advance. But Robson believes interest will be rewarded in 2026. The relaxation of Germany’s debt brake – which ends a strict limit on borrowing in order for Germany to spend more on defence and to create an infrastructure fund – are set to unlock growth, he says, with lower interest rates lending support.
Oliver Collin, co-head of UK and European equities at Invesco, notes that “some investors have become frustrated at the slowness of progress for its game-changing infrastructure-spending plans”. But he notes the German budget law was passed only in September, meaning infrastructure spending will accelerate from late 2025.
“With tariff uncertainty fading and fiscal support accelerating, GDP and EPS growth prospects are improving. Low expectations are typically a strong backdrop for future investment returns. This bodes well for European stocks, an asset class long ignored by many,” he says.
Goldman Sachs Asset Management (GSAM), in a 2026 outlook, advises investors to study the speed and execution of Germany’s fiscal package, given the recent track record of “underdelivering on budgeted investments”. The firm says the passing of the budget law could increase spending in 2026.
“Even if the implementation of higher defence spending is gradual and complex, we believe it represents a potentially significant medium-term boost for growth.”
Waning interest in US markets
Among institutional investors such as pension funds and sovereign wealth funds, Natixis Investment Managers recently found that allocations to US equities are set to fall and allocations to Europe are set to rise – although the increase is not as much as for Asia.
A waning interest in US markets means 75% of investors in the Natixis IM survey plan to reduce or maintain exposure in US equities. Pipped slightly by preference for Asian stock markets, these investors – 515 of them who collectively manage $29.9 trillion of assets globally – nevertheless showed that 40% of them will increase and 44% of them will maintain allocations to European stocks.
However, they appear less optimistic in their tone than do the slew of fund manager reports recently published. The research suggests they think markets could run out of luck in the new year, as 74% say markets are due for a correction. Two thirds (66%) of institutions worry that slow growth may be a harbinger of recession, which they rank as one of their top three economic threats.
Andrew Benton, a regional head including for Northern Europe at Natixis IM, said, that “even with challenges and potential pitfalls, investors maintain a level of optimism around their market prospects, as they actively seek out greater diversification and focus in on adaptability and risk management”.
This diversification again sees emerging markets in play, with half of institutions believing India will surpass China as the leading emerging market investment.
Political uncertainty in France
Europe’s largest homegrown asset manager Amundi also speaks of Europe less exuberantly than others. Amundi expects growth in Europe to remain below potential at 0.9% in 2026, but then to recover at 1.3% in 2027, both in the Eurozone and in the UK. Even growth in emerging markets – which the firm says is set to moderate – should still outpace Europe.
Perhaps Amundi’s relatively downbeat prognosis is influenced by affairs at home. With geopolitical uncertainty still high in investors’ mind, France is currently in political turmoil after events that have included a hung parliament.
Invesco’s Oliver Collin says the political uncertainty in France is not so different from the situation a year ago in Germany, when investors were pessimistic towards European equities.
“This time French politics is at the forefront of investors’ minds…,” he notes, and says there may be no magic wand for France but news flow has the potential to “positively surprise the low expectations”.
Where Amundi is more positive on European stocks is in the financial, industrial, defence and green-transition sectors, as well as on small and mid-caps. The firm adds that Europe’s attractiveness “should rise over the year as reforms, together with defence and infrastructure spending, translate into concrete opportunities in investment grade credit and small- and mid-cap equities”.
Vincent Mortier, group CIO of Amundi, added: “Diversification remains the most effective defence in a world of concentrated equity markets and high valuations. Investor portfolios must rebalance across styles, sectors, sizes and regions to mitigate risks and capture opportunities, notably in emerging markets and European assets.”
A view from America
BlackRock, saying its views are from a US dollar perspective, has a neutral stance on Europe, though where it does like Europe is also in financials, industrials, utilities (driven by the political focus on energy) and healthcare. This neutral stance is due to lagging earnings growth relative to the US and the neutral stance includes the UK, despite attractive valuations compared to US stocks.
“We would need to see more business-friendly policy and deeper capital markets for recent outperformance to continue and to justify a broad overweight,” the firm said.
BlackRock remains overweight US stocks but sees the AI theme broadening to Asia. Risk appetite is supported by Fed rate cuts, the firm says.
Finally, at GSAM, where the speed and execution of the German fiscal package is being watched, the firm says the passing of the budget law could increase spending in 2026 and that higher defence spending – even if gradual and complex – represents a potentially significant medium-term boost for growth.
A capital expenditure “revival” is taking place across Europe, the firms says, owing to stimulus packages and companies that have underinvested for two decades are making renewed investment in capital-intensive sectors, driven by energy transition and security, defence, reshoring, infrastructure upgrades, digitalisation, and AI.
GSAM acknowledged political developments in France add to a “complex backdrop” for markets and said that high energy prices were among headwinds for Germany. But underperformance observed among high-quality businesses in 2025 may present an opportunity to selectively add exposures, “particularly with Europe’s economy at an inflection point”.
Greater fiscal flexibility (such as Germany’s easing of the debt brake for defence and infrastructure) and reindustrialisation (initiatives such as the EU’s Clean Industrial Deal and European Defence Industry Programme) will likely contribute to European economic growth in 2026 and beyond, says GSAM, and this would narrow the GDP growth gap with the US.
