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Investing.com -- Barclays has set a target of 620 for the SXXP index, representing a 9% increase, as the brokerage identifies six fundamental drivers expected to propel European equities higher in 2026 despite near-term policy uncertainties.
The brokerage maintains a pro-cyclical sector tilt while acknowledging that the path ahead is narrow with high tail risks.
European equities appear well-positioned to capture reflationary tailwinds given their cheaper valuation, lower crowding and easier earnings comparisons, without being overly dependent on the fate of the AI trade, the strategists said.
If the AI boom doesn’t end in tears and other parts of the market manage to catch up, equities should be able to deliver positive returns and beat bonds again in 2026.
Artificial intelligence growth remains on solid footing despite risks. While economies and markets’ over-reliance on the AI narrative raises concerns particularly for the United States and Asia, the growth impetus from AI-related capex will stay positive.
Rising leverage to fund capex by hyperscalers may warrant higher risk premia and more differentiation, but it starts from a low level and is backed by strong cash generation as AI adoption rises fast.
Financial repression forms the second pillar, with ever-growing public debts and deficits forcing central banks to let economies run hot and keep a lid on rates.
Barclays looks for three more cuts by the Fed and an end to quantitative tightening, though changing expectations of the terminal rate may fuel volatility.
A cyclical recovery represents the third driver. As the tariff drag moderates, monetary and fiscal policy easing in the United States and Germany should lift US and EU GDP growth above potential, as China stays weak.
Rate cuts and Trump’s affordability push should help consumer recovery, while easing financial conditions may lift non-residential capex.
Earnings growth forms the fourth driver, with operating leverage, easy comps and fading foreign exchange headwinds expected to help European EPS grow 8% in 2026, led by cyclicals, after being flat for three years.
The forecast sits slightly below consensus at 12%, but Barclays expects milder-than-usual downgrades.
On valuations, the brokerage sees room for only a small further P/E re-rating in Europe given positive EPS momentum, supportive liquidity and strong balance sheets.
Positioning dynamics complete the framework. Aggregate positioning is above-average but not extreme and highly concentrated, with $7.5 trillion in money market funds and 70% of announced buybacks for 2026 yet to be executed.
Post-November CTA and hedge fund de-grossing, froth has been reduced and the retail frenzy has calmed down.
December seasonality is supportive and the recent positioning wash-out has reduced froth, though stocks up approximately 20% in 2025 raise the bar for positive surprises.