Introduction to European Markets in 2026
European markets are entering 2026 on a positive note, with reduced recession fears, inflation close to central bank targets, and fiscal packages beginning to filter through to the real economy. Several European assets still trade at more moderate valuations than their US peers.
Key Takeaways
- Economic growth remains modest but is expected to gradually improve into 2027.
- Energy markets shift from crisis management to structural transition.
- Stocks in Europe remain cheaper than their US peers, with tailwinds from macroeconomic recovery, moderate inflation, low interest rates, and higher spending.
Europe’s Growth Outlook: A Gradual Recovery, Not a Boom
After several years of weak and uneven expansion, Europe is entering 2026 with a more stable – if still modest – growth outlook. The European Commission projects that real GDP in the EU will grow by 1.4% in 2026 and 1.5% in 2027, driven primarily by private consumption and investment. Large member states such as Germany, France, Italy, and Spain are all expected to expand.
European Stocks: Where Investors Should Focus
European equity markets enter 2026 against a more supportive macroeconomic backdrop. Growth expectations have improved modestly, inflation risks have shifted to the downside, and greater clarity on trade conditions has reduced a key source of uncertainty for investors. Fiscal support is becoming more visible, with parts of Germany’s infrastructure fund set to be deployed and higher defense spending across Europe about to provide a tangible boost to industrial activity.
Euro vs USD: From Undervalued to Stabilising
The euro enters 2026 at around 1.16 against the dollar, priced well below its long-term fair value of 1.20. While the eurozone faces its own structural challenges, the currency’s relative stability, institutional credibility, and external balance sheet strength are helping increase its share in portfolio allocation decisions worldwide.
Beyond Europe’s Energy Crisis
The energy sector shifts focus from crisis response following the war in Ukraine to long-term transformation. Natural gas prices have fallen markedly from their peaks in 2022 and are currently shaped by ample supply, subdued short-term demand, and the absence of major disruptions.
AI and Power Demand in Europe: What 2026 Means for Investors
Despite growing demand, power supply also looks sufficient this winter and in the years ahead. Electricity demand is set to grow over the next decades, driven in part by AI needs. Average European power prices are likely to decline in 2026, mainly due to declining gas prices.
Conclusion
In conclusion, European markets are poised for a gradual recovery in 2026, driven by improved growth prospects, moderate inflation, and supportive fiscal policies. While the energy sector is shifting its focus from crisis management to structural transition, power supply is expected to remain sufficient. Investors should focus on European stocks, which remain cheaper than their US peers, and keep an eye on the euro, which is expected to stabilize against the dollar. As the energy sector continues to evolve, investors should also consider the impact of AI on power demand and the potential for average European power prices to decline in 2026.
