Our monthly-updated ETF Opportunities series covers the world’s major equity and fixed income markets, each featuring three charts that have been carefully selected to highlight what we believe to be the best ETF investment opportunities, and the key risks, in today’s fast moving market environment.
1. A fiscal pivot is underway
While trade tensions have dominated the economic narrative in 2025, in Europe the impact of supportive fiscal policy is likely to become more prominent in 2026. Fiscal stimulus is most obvious in Germany, where the government is set to spend EUR 500 billion on infrastructure investment, as well as having eased its domestic debt brake to free up fiscal space for defence spending. This fiscal shift is meaningful: Germany’s deficit is forecast to rise from below 2% of GDP in 2024 to near 4%, with government investment growth accelerating sharply. Elsewhere, disbursements from the European Union’s Recovery Fund will continue to support growth in Spain, Italy and other southern European economies, while increased defence spending should begin to feed through into the European manufacturing sector. While some nations, notably France, face more constrained fiscal outlooks, overall the fiscal policy backdrop looks set to support European activity in 2026, as should the ongoing impact of past rate cuts from the European Central Bank.
2. Earnings growth is set to pick up
Europe’s more supportive fiscal backdrop, as well as the easing of some headwinds, is expected to lead to stronger earnings growth in 2026. The sharp appreciation of the euro in 2025 has weighed on European earnings growth, given that half of revenues from the MSCI Europe Index are derived overseas. Lower energy prices have also dragged on index-level profit growth, given the larger weight of these sectors in European markets than in other regional indices. However, both of these headwinds look set to ease next year. The effect of trade tensions on earnings should also normalize somewhat, as companies adapt to the terms agreed in the EU-US trade deal. Given easing headwinds and fiscal support, earnings per share growth for the MSCI Europe Index is forecast to accelerate meaningfully in 2026. A return to profit growth, paired with the attractive income on offer in European equities—MSCI Europe’s total shareholder yield (dividends plus buybacks) sits above 4%—should support European equity inflows and performance.
3. European equities trade at bigger-than-average discounts
The European stock market currently sits on a valuation broadly in line with its long-run average. But compared to the US, European stocks look cheap. This European valuation discount does not just capture the differing sector compositions of the US and European markets. Nearly every European sector currently trades at an above-average discount to its US counterpart. As a result, there is scope for investors to tilt towards European companies with strong fundamentals currently trading at less lofty valuations. A selective approach might be prudent, however, to best capture potential earnings upside stemming from more supportive fiscal policy and resilient activity, as well as to account for the variation in US tariff exposure across European firms. For example, European financials trade on a large discount to their US peers, despite having delivered an astonishing 30 percentage points more profit growth since 2019. A pick-up in growth, paired with interest rates that are still well above their levels from the 2010s, should continue to support earnings—and performance—in the financials sector.