Episode summary
What’s Driving European Stocks in 2026
Thoughts on the Market (Morgan Stanley)
· · 12 min · Hosts: Paul Walsh, Marina Zavolock
Summary
European equities have started 2026 with a stronger relative tone, and the guest argues that a major valuation break may be underway. She says European stocks have outperformed U.S. stocks since the U.S. elections in constant-currency terms, and that European valuations have finally broken above the top of a decade-long discount range versus the U.S. That does not make Europe a full-year winner in her view, but it does suggest a narrower performance gap and a more favorable setup for stock pickers.
Flows are also supporting the case for Europe, with investors again looking to diversify away from U.S. concentration. Still, the guest says Europe’s headline earnings growth looks weak relative to the U.S., with Morgan Stanley forecasting 4% earnings growth for Europe versus 17% for the U.S., so broad index outperformance looks difficult. Instead, the bull case rests on themes such as AI adoption, M&A, easing competition rules, releveraging, and structural reforms like a savings and investment union.
Within Europe, she favors stock selection over style bets. Morgan Stanley’s models point to banks, defense, utilities and AI-related names, while avoiding autos, chemicals, luxury, transport, and food and beverage. The host adds that semicap equipment, memory, and humanoid-robot exposure could be important longer-term growth areas.
Key takeaways
- The guest says European equities have broken above a 10-year valuation discount range versus the U.S., which historically has preceded a narrower discount over time.
- Morgan Stanley’s base case is only 4% earnings growth for Europe versus 17% for the U.S., so the guest does not expect Europe to beat the U.S. outright across 2026.
- The guest says AI adoption is the most important bull-case theme, with leading European adopters showing stronger earnings and return outperformance.
- The guest favors banks, defense, utilities and AI-related stocks, while Morgan Stanley’s model avoids autos, chemicals, luxury, transport, and food and beverage.
- The host says semicap equipment and memory look attractive because wafer fab equipment spending is expected to grow double digits in 2026 and 2027.
Notable quotes
“European equities have broken the top of that discount range”
“I still struggle to see European equities outperforming the US over the course of the full year”
“the biggest debate of all, Paul, that's what you start with”
“I think the most important one is AI adoption”
“For the last couple of years, we're seeing dispersion rising”
How the episode opens
Welcome to Thoughts on the Market. I'm Paul Walsh, Schmorggan Stany's head of research product here in Europe. — And I'm Marina Zavaloc, chief European equity strategist.
Today, we're here to talk about the big debates for European equities moving into 2026. It's Friday, January the 16th at 8:00 a.m. in London.
Marina, it's great to have you on Thoughts on the Market. I think we've got a fascinating year ahead of us and there are plenty of big debates to be exploring here in Europe. But let's kick it off with the sort of obvious comparison to the US.
How are you thinking about European equities versus the US right now? When we cast our eyes back to last year, we had this surprising outperformance. Could that repeat?
Yeah, the biggest debate of all, Paul, that's what you start with. So, actually, it's not just last year. If you look since US elections, I think it would surprise most people to know that if you compare in constant currency terms, so if you look in dollar terms or if you look in euro terms, European equities have outperformed US equities since US elections, I don't I don't think that's something that a lot of people really think about as a fact.
And something very interesting has happened at at the start of this year. And let me set the scene before I tell you what that is. In the last 10 years, European equities have been in this constantly widening discount uh range uh versus the US on valuation.
So, next PE there's been, you know, we we have tactical rallies from time to time,
But they they they in the last 10 years, they've always been tactical, but we're in this downward structural range where their discount just keeps going wider and wider and wider.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- european stocks 2026
- european equity strategy
- market themes
- european research outlook
Watch the episode
Watch “What’s Driving European Stocks in 2026” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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