Deutsche Bank sees 12-16% upside for major European indices

Investing.com -- Deutsche Bank expects European equities to extend gains over the next year, citing improving macro conditions, a recovery in earnings and a powerful fiscal impulse coming from Germany.

“For 2026, we project 12-16% upside for major European indices,” driven by double-digit profit growth and still undemanding valuations, strategists led by Maximilian Uleer said in a new report.

The bank notes that it has been more constructive than consensus for the past three years and again asks whether it will be the “lonely bull” in a market still marked by disbelief.

Current market frustration over the recent rally continues to fuel a narrative of disbelief, but the strategists remain constructive both tactically and on a longer-term view. Low expectations, they argue, leave room for positive surprises as earnings revisions have stabilised.

The approval of Germany’s 2025 budget is seen as a turning point for sentiment in the region. During the bear market last year, Deutsche Bank urged investors not to underestimate Germany’s capacity to change, and now emphasises that the stimulus phase is moving from announcement to implementation.

This is expected to accelerate manufacturing momentum and lift guidance during the Q3 earnings season.

Now, the strategists argue that confidence is improving and that low expectations provide room for positive surprises, particularly as trade uncertainty has eased after the EU secured a deal with the U.S.

On the earnings front, the bank expects those to accelerate. Specifically, it forecasts earnings in the STOXX 600 to grow by 10-12% next year.

Autos, Energy and Materials — which were a drag in 2025 — are forecast to stabilise or turn positive contributors in 2026, alongside strong growth from Health Care, Financials and Industrials.

Consensus expectations for Q3 remain cautious, but strategists anticipate earnings beats and upward revisions for both 2025 and 2026.

Valuations remain a key argument in favour of Europe versus the U.S., with the STOXX 600 trading close to its historical average while U.S. equities have re-rated sharply. 

"We are positive on both regions but expect the 15 years of underperformance of European versus US equities to have come to an end," the report states. 

The strategists see particular upside in German mid-caps, expecting the MDAX to outperform as fiscal stimulus begins to flow through the economy. Small and mid-cap equities are highlighted as trading at a discount compared to large caps and more sensitive to the recovery in manufacturing PMIs.

Regionally, Deutsche Bank has shifted back to a positive stance on Europe versus the U.S., arguing that rising U.S. concentration risk, fiscal strain and elevated valuations create a more compelling relative case for European markets.

The strategists also point to supportive seasonality into year-end, with Q4 historically being the strongest quarter for equity returns.

Overall, the bank forecasts further gains of up to 7% for European benchmarks in Q4 and sees scope for a more substantial advance through 2026 as earnings recover and fiscal support gains traction.