Economic Growth Is Forecast to Drive a ‘Modest’ Rise in European Stocks This Year

Goldman Sachs Research forecasts “modest positive returns” for European stocks in 2026, driven by good global economic growth and falling interest rates in the US.

Our strategists expect Europe’s STOXX 600 index to generate an 8% total return this year (as of January 6). Rising corporate earnings are projected to boost the region’s stocks, writes Sharon Bell, a senior strategist in Goldman Sachs Research, in the team’s report.

“We see a positive profit trajectory, driven by good global growth, domestic fiscal / defense spend, and continued company focus on margins and returns,” Bell writes.

What might impact European stocks this year?

Bell’s team expects European stocks to get a boost from continued global economic growth in 2026. Our economists forecast global real GDP to increase by 2.9% in 2026, while the euro area economy is projected to grow 1.3%.

This growth backdrop should support higher corporate earnings, according to the European Equity Strategy team, who forecast 5% STOXX 600 earnings-per-share (EPS) growth in 2026 and 7% in 2027.

However, a weak dollar could hurt the earnings of large, international European companies this year, reducing the relative value of their sales in the US. Our foreign exchange strategists forecast that the euro will be worth 1.25 dollars in 12 months’ time, compared to 1.16 as of January 9.

The expected dollar weakness has reduced Goldman Sachs Research’s forecast for European EPS by between two and three percentage points, Bell writes.

In addition, forecasts for a drop in the price of oil have diminished the team’s expectations for energy company earnings, which make up around 5%-10% of aggregate European EPS.

Notwithstanding the drag from foreign exchange and oil, the team expects higher fiscal spending by some European governments and a focus from companies on profit margins and investor returns to help European company earnings this year.

The auto sector should also provide a boost to earnings in 2026, the team writes. Most stocks in the sector are set to see EPS growth of over 100% this year after a collapse in 2025, according to a consensus of economist estimates. And although this is a relatively small sector, the substantial increase in earnings will likely boost overall European EPS by 2-3 percentage points this year, Bell writes.

Last year, European stocks experienced some inflows from both domestic and foreign investors. That’s a change “from persistent net selling,” especially by domestic investors, from 2022-2024, Bell writes.

With that said, over a four-to-five year window, cumulative flows have only just turned positive, and they are still low compared with other regions.

Is now a good time to buy European stocks?

The European stock market is not cheap when compared with its own history. The stock market valuation stands at 15 times its 2026 price-to-earnings ratio (P/E), which puts it in the 70th percentile over the last 25 years.

“However, it remains cheap versus more or less all other assets,” Bell writes. For example, European stocks trade at a substantial discount to their US peers, based on their price/earnings-to-growth ratio, an earnings multiple that factors in a company’s expected future growth.

Similarly, European stock valuations are modest when compared with tight credit spreads—a way of measuring the extra return that investors generate for taking on more risk in the bond market.

Given that US stocks are expensive and the US stock market is highly concentrated, Goldman Sachs Research recommends diversifying investments outside the US. Bell points out that this strategy “worked well last year, especially for USD investors.”

In recent conversations with US investors, the equity strategy team has found an increased desire to diversify. “European concentration is low in contrast to the US, and Europe is seen as providing value which is not readily available in the US market,” Bell explains.

At the same time, the team finds that flows from US investors into Europe are tied to economic growth signals. “Some improvement in growth momentum in Europe will therefore likely be needed next year,” Bell writes.

Which European sectors could rally this year?

Cyclical stocks (whose performance tends to be linked to the economic cycle) performed “exceptionally well” in 2025, Bell writes. That said, the strength of these stocks was skewed by a rally in bank stocks, which are catching up after more than a decade of underperformance following the Global Financial Crisis.

At the same time, the apparent underperformance of defensives (companies which provide something that is likely to be in demand, regardless of the economic conditions) was influenced by pricing pressures pushing down the healthcare sector.

“As we are above consensus for global growth in 2026, we tend to be more inclined to a further cyclical rally,” Bell writes.

In particular, Bell expects European banks and financial services companies to perform well this year, benefiting from de-regulation, mergers-and-acquisitions activity, and a pick-up in the primary markets. She also anticipates gains in European technology stocks, which the team sees as relatively cheap versus US peers given their growth expectations.

Meanwhile, the European equity strategy team expects European chemicals and autos companies to remain under pressure due to competition and export growth from China. “But these represent a small share of the STOXX 600's market capitalization, and most of the market (financials, services, commodities etc.) has little or no China exposure,” Bell writes.

European small-cap stocks could benefit this year from improving domestic economic growth, further appreciation of the euro (which tends to hit large-cap international companies which generate revenue abroad), rising M&A activity, a fall in the oil price, and relatively low valuations relative to history, Bell says. This makes small-cap stocks “attractive targets to buyouts as well as corporates,” she adds.

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