European stocks to scale new heights in 2026, trade tensions temper loftier hopes

A Reuters poll indicates European stocks are projected to experience modest gains by the end of 2025, with the STOXX 600 expected to reach 557 points, followed by stronger performance in 2026, driven by monetary easing and increased fiscal spending. However, trade tensions, particularly between the U.S. and EU, are tempering expectations for more substantial gains, as evidenced by market volatility following tariff-related announcements. Despite these concerns, Germany's increased spending on defense and infrastructure, coupled with anticipated ECB rate cuts, are expected to positively influence the market, though some analysts believe much of this positive news is already priced in.

Analysis

A Reuters poll of equity analysts and portfolio managers projects modest gains for European equities by the end of 2025, with the pan-European STOXX 600 (.STOXX) index anticipated to reach 557 points, a 0.9% increase from current levels, before potentially scaling new heights to 570 points by mid-2026 and maintaining that level through year-end. This outlook, however, represents a downward revision from an earlier mid-2026 forecast of 610 points. The primary drivers for this cautious optimism are expected monetary easing, with the European Central Bank widely anticipated to cut interest rates to 2%, and increased fiscal spending, notably Germany's planned investments in defense and infrastructure. Conversely, persistent U.S.-EU trade tensions and tariff uncertainties significantly temper expectations for more substantial gains, as highlighted by recent market volatility, such as the STOXX 600's 2.7% slump following President Trump's threat of 50% tariffs on the EU, and the subsequent relief rally when implementation was delayed; the poll was conducted before a U.S. court blocked Trump's April 2 import duties. Year-to-date, the STOXX 600 has rallied nearly 9%, outperforming the S&P 500's (.SPX) 0.7% rise, partly due to a "Sell America" sentiment and euro area stimulus. The blue-chip Euro STOXX 50 (.STOXX50E) is also forecasted for a 0.6% gain in 2025, reaching 5,700 by end-2026. Despite positive fiscal impetus expected to benefit industrials, some analysts caution that much positive news is already priced in, and a recovering euro could pose a headwind. Notably, Germany's DAX (.GDAXI), after a more than 20% surge in 2025 and reaching record highs, is predicted to decline 5.1% by year-end, reflecting this sentiment.

Key Decisions for Investors

• Investors should anticipate continued volatility in European markets, primarily driven by U.S.-EU trade policy uncertainty, necessitating close monitoring of tariff discussions for potential market shocks.
• A cautiously optimistic long-term view for European equities through 2026 is warranted, supported by monetary easing and fiscal stimulus, though near-term gains by end-2025 are expected to be limited with the STOXX 600 forecasted up only 0.9%.
• Selectively consider European industrials benefiting from German fiscal spending, while remaining aware that positive catalysts may be partially priced in and a stronger euro could present headwinds to exporters.
• Given the German DAX's forecasted 5.1% pullback by year-end after significant gains, tactical caution may be prudent for this specific index, even as broader European markets have shown relative strength against U.S. equities year-to-date.