We see plenty of reasons to be optimistic about Europe’s 2026 outlook relative to other regions.
Valuations are reasonable and there is clear scope for earnings to grow faster in 2026. Further positive catalysts include German fiscal stimulus building momentum, potentially more European Central Bank policy easing and a potential resolution to the war in Ukraine. We also expect 2026 to show more tangible examples of companies deploying artificial intelligence and delivering efficiencies.
However, it is within the market that we argue there is more significant mispricing.
We expect dividend strategies to follow the historical pattern of performing significantly better when excessive market exuberance normalises.
To our mind, the dramatic underperformance of quality stocks has gone too far. We see a once-in-a-decade-plus opportunity to buy high quality companies at compelling starting valuations. Many of these stocks have historically been too expensive for us – and were clearly overvalued in 2021. The steady derating of quality stocks since then has followed the typical pattern of financial markets, initially clearly rational before ultimately swinging too far the other way.
2025 saw winners focused on defence, cyclical value and capital expenditure on artificial intelligence. We see quality stocks offering more durable growth prospects than these sectors. Quality stocks continue to offer steady growth and fundamental strength that is not visible in their share prices due to valuation compression.
We expect dividend strategies to follow the historical pattern of performing significantly better when excessive market exuberance normalises. The post-pandemic dividend reset at many companies has created a new dividend paradigm in Europe. Companies that successfully navigated 2020-23's disruptions now generate structurally higher free cashflows, supporting sustainable dividend growth even as economic momentum moderates.
