According to a survey conducted by an institution, European stocks are expected to overcome significant challenges posed by the threat of a US-Europe trade war and geopolitical tensions, provided the European economic outlook offers robust support and a larger influx of US capital pours into the European equity market. The median consensus forecast among Wall Street strategists indicates that the benchmark European stock index—the Stoxx Europe 600 Index—will rise by approximately 4% by the end of 2026, implying an increase to 626 points from Wednesday's closing level. Wall Street financial giants Goldman Sachs Group and HSBC have consistently raised their target levels for European stocks since the last Bloomberg Intelligence survey of analysts in December, maintaining a bullish outlook on the investment prospects of European equities despite high valuations following a strong rally in 2025 and potential geopolitical risks. The bullish confidence of Goldman Sachs and HSBC is built on European economic resilience and earnings growth, accommodative monetary policy, and a faster pace of fiscal expenditure. HSBC is now the most strongly bullish force on European stocks, having raised its target for the Stoxx 600 index from 640 points to 670 points, implying a potential upside of about 11% for the remainder of the year. Among the 18 Wall Street strategists surveyed, only three anticipate a potential downside of approximately 4% or more: TFS Derivatives, Bank of America, and Societe Generale. As the chart above shows, Wall Street strategists generally expect further gains for European stocks in 2026; the median forecast suggests a 4% rise for the Stoxx 600, with bears becoming increasingly scarce. "With the full rollout of infrastructure stimulus policies focused on AI and defense, an acceleration in European growth is imminent," said Gerry Fowler, Head of European Equity Strategy at UBS Group. "This is a very opportune time, as valuations are approaching the target levels we anticipate, and we expect the Stoxx 600 to reach 650, primarily driven by profit growth." Fowler and his team believe that stronger economic growth on the continent and rising bond yields favor cyclical value stocks, which have a significant weighting in European equities, where margin expansion can drive substantial investment returns. The UBS analyst team most prefers stocks in the financials, utilities, transportation, retail, medical devices, and tech hardware sectors. They maintain a cautious stance on the European automotive, chemicals, food, beverage and tobacco, and home products sectors, citing significant pressures from monetary policy and ongoing tariff impacts. The Stoxx Europe 600 index has risen nearly 3% year-to-date, continuing its strong start over the past three years after gaining almost 17% in 2025. The core leading themes in the actual performance of European stocks remain unchanged—namely, semiconductors, defense, and mining stocks continue to lead gains, while consumer staples continue to lag the broader European market. European stocks experienced a brief pullback following renewed aggressive tariff rhetoric from US President Trump, but quickly resumed their upward trend after he subsequently indicated he would avoid imposing further tariffs on European countries and pointed towards a future Greenland agreement framework. The European economy can rely on substantial fiscal support, including over €2 trillion (approximately $2.3 trillion) in investment for AI-enabled power grids and clean energy, a €500 billion off-budget large infrastructure fund from the German government, and increasing commitments to defense spending. However, with overall market valuations near their highest level in four years and Wall Street analysts forecasting overall corporate earnings growth of about 10% for European stocks this year, they also indicate a relatively high probability of some negative surprises. "Following a strong rebound in December and early January, the Stoxx 600 index is already approaching the upper end of our target range for 2026," said Roland Kaloyan, a senior strategist at Societe Generale, whose target is merely 580 points, implying a potential downside of about 4% from Wednesday's close. "The European equity market is currently trading at a forward P/E of around 15 times, which also implies double-digit EPS growth for the continent this year. In our view, this target is too high considering the macroeconomic backdrop, and some market segments—particularly more cyclical ones with significant weight—may need to adjust to the reality of slower growth in this new investment environment," the senior strategist stated. The chart above shows that the strong gains in European stocks since 2025 have been largely driven by valuation expansion, with earnings expectations now taking over the baton, albeit at a relatively slower pace. Investors focused on both the pan-European Stoxx Europe 600 Index and the S&P 500 Index are chasing a fourth consecutive year of gains. Large bank stocks and defense giants drove the bulk of the European market's gains throughout 2025; in contrast, while US defense and bank stocks also advanced, their contribution to the US market's rise was minimal, as the continued strength of mega-cap tech stocks like Nvidia, Microsoft, and Google has been the core logic behind the US market hitting multiple record highs since 2023—whereas across the Atlantic, the technology sector holds a much smaller weighting in European equity markets. Goldman Sachs strategists wrote in a research report that global fund positioning in European equities remains light, as 2025 represented a year of tentative return of buying interest after sustained net selling from 2022 to 2024. "Given that the US market is both expensive and highly concentrated in exposure to highly-valued tech giants, we advocate for diversified capital allocation," Goldman Sachs strategists wrote in a report. They noted that US-based investors remain concerned about exposure risks from a weaker US dollar and are seeking alternative sources of equity value growth in other parts of the world. Investors have shown strong bullish sentiment towards European stocks since the start of the year. A survey of European fund managers by Bank of America showed that 95% of respondents expect European equities to rise over the next 12 months, setting a new record and exceeding last month's figure of 92%. The survey indicated that while geopolitics has become the biggest tail risk for European stocks, cash levels have still fallen to a 12-year low. "European equity valuations are high, but from a historical perspective, if the earnings backdrop remains supportive, these valuations are generally unlikely to hit an upside ceiling. The Swiss market is a clear exception, often experiencing flat or negative returns when its forward P/E exceeds 18 times. Conversely, the UK's FTSE 100 still offers valuation support and could deliver very favorable 1-year and 3-year returns, particularly if financial conditions ease," said Laurent Douillet, Senior Equity Strategist at Bloomberg Intelligence, in a research report. Since last year, the region has benefited from an economic growth rebound and a trend of asset diversification away from the US market, which has also propelled the rally in emerging market stocks since late 2025, a trend expected to continue this year. The Goldman Sachs strategy team significantly raised its target for the Europe Stoxx 600 index to 625 this month, based on global growth expectations, and expressed particular optimism for the banking, technology, and defense sectors. "In our conversations with US clients, we find they have greater interest in global diversification, and they are especially bullish on European value stocks," according to the latest views from Goldman Sachs strategists. Driven by investors seeking further diversification from the US market and its concentration in high-valued tech stocks, European equities are poised for a strong boost this year after outperforming US stocks in 2025. "The long-prevailing narrative of 'American exceptionalism' appears to have peaked and is beginning a trajectory of retreat, with global investors increasingly focusing on non-US equity markets, particularly European stocks."