David Lambert, Managing Director & Senior Portfolio Manager, Head of European Equities, RBC Global Asset Management (UK) Limited, summarizes the market in 2025 for the asset class, and gives his thoughts for 2026.
European equities performed positively over the course of 2025, with strong gains in Spain and Italy, driven by Germany’s fiscal stimulus plan boosting domestic stocks in Q1.
What we haven't seen consistently in Europe over the last number of years is earnings growth. However, with the German fiscal stimulus plan on infrastructure and defence starting to come through, we expect this to have a positive impact on domestic earnings growth within Europe itself.
European banks are still the largest sector in Europe, and offer attractive valuations, strong shareholder distributions, and benefit from emerging loan growth.
Current valuations imply minimal long-term growth expectations (0-1%), so even modest earnings improvements could significantly lift returns.
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How would you summarize 2025 in European Equities?
David Lambert
2025 was a really interesting year for European equities, and they ended up very positive over the course of the year. We're up 25% in U.S. dollar terms, but there were individual markets within Europe, like Spain, which was up 50% on U.S. dollar terms, and Italy was up 40% in U.S. dollar terms. They were really, really strong. Now, a lot of this was driven from the first quarter, where we got the German fiscal plan coming out, and that gave European domestic stocks, in particular, a real boost. Now, through the middle part of the year, we flatlined and have now started to move up again as we move into the latter part of the year. So all in all, it's been a very positive year for European equities.
What is your outlook for European Equities in 2026?
David Lambert
Coming into 2026, I think the setup's really interesting for European equities. I haven't really been able to say that for many years. The valuation levels are still very low compared to somewhere like the U.S. Although versus the 20-year median, we're slightly above where we have been. But what is quite interesting is the earnings dynamic coming through. What we haven't really seen in Europe consistently over the last number of years is earnings growth. Now, with the German fiscal stimulus plan on infrastructure and defense starting to come through, we expect this to have a positive impact on domestic earnings growth within Europe itself.
Now, if we think of Europe as earnings coming from domestic Europe, the U.S., and emerging markets, whereas the U.S. and emerging markets have really held up earnings for Europe in aggregate over the last number of years, European domestic earnings have lagged. Now, if we start to see this come through positively, then as a whole, European earnings should start to improve. Now we're seeing that in consensus numbers going into next year, we're looking for even 13%, 14% earnings growth across Europe. This, built on the valuation levels we currently have, is quite an attractive setup.
Within Europe itself, European banks, which is the largest sector, still on very attractive valuations. They have clean balance sheets, strong shareholder distributions, and actually, we're seeing loan growth coming through within Europe, which again is a positive setup for Europe's largest sector. When we look at Europe as a whole on aggregate, and we look at the valuations and what's baked in from a growth perspective is fairly low. So, if we reverse engineer what growth into perpetuity is baked into current valuations, we're looking at 0 to 1% growth. Whereas we look at other regions in the world, we're looking at 3 to 4% growth. Now, if we expect that 0 to 1% to improve even slightly, then that can ultimately have a big kicker on valuations and total returns that shareholders could expect from European equities.
Video recorded on November 21, 2025