European Equities Poised for Outperformance After 15 Years, Deutsche Bank Says

After a decade and a half of lagging behind U.S. markets, European equities are now expected to deliver significant gains, according to a recent upgrade from Deutsche Bank, potentially offering investors a new avenue for growth as valuations in the U.S. become stretched.

Strategists at Deutsche Bank shifted their outlook on the region to positive today, citing “cheaper valuations, higher diversification and a strong fiscal impulse.” They predict gains of up to 16% across major European indices by 2026, with sectors like autos, energy, and materials leading the way. The Stoxx 600 could see up to 12% earnings growth in 2026, the bank forecasts. “Tactically, we expect further upside for European equities until year-end,” they noted in an October report. This shift comes after a downgrade in July, signaling a rapid reassessment of the region’s potential.

UBS also supports the bullish outlook, pointing to opportunities within domestic European markets less exposed to global trade volatility. Gerry Fowler of UBS forecasts annualized returns of 10% for the Stoxx 600, a level Europe hasn’t seen in some time. Germany, in particular, is expected to benefit from increased spending following the approval of its 2025 budget and billions earmarked for defense, with a significant portion of those contracts going to European manufacturers – a boost to the continent’s industrial sector. For more on global economic trends, see the International Monetary Fund’s latest reports.

While acknowledging potential short-term uncertainty due to political factors in France, Deutsche Bank believes broader economic forces will have a greater impact on French stocks, projecting a 14% upside for the CAC 40 by the end of 2026. The Stoxx 600 is already up nearly 11% year-to-date, while Germany’s DAX and France’s CAC 40 have risen almost 22% and 7.5% respectively. Analysts also point to a growing IPO market in Europe, like the recent 3.2 billion euro listing of Verisure, as a sign of renewed confidence. You can find more information about European stock indices here.

Deutsche Bank anticipates continued strong performance in the U.S., but also highlights growing concentration risks within the S&P 500 and a potential worsening of the U.S. debt ratio, suggesting a shift in the balance of investment opportunities.