Name: What’s Driving European Stocks in 2026
Uploaded: 2026-01-17T00:41:43+00:00
Duration: 694 s

Speakers

Marina Zavolock — Chief European Equity Strategist, Morgan Stanley

Paul Walsh — Head of Research Product, Europe

Summary

Morgan Stanley's Paul Walsh and Marina Zavolock discuss the main debates for European equities in 2026. They see Europe's valuation discount to the US narrowing, but weaker earnings growth limits full-year relative outperformance and favors stock picking and specific themes. Favored areas include European AI adopters, banks, defense, powering AI/utilities, and semiconductors, while autos, chemicals, luxury, transport, and food and beverage are avoided.

Europe has broken a decade-long valuation discount range versus the US, supported by diversification inflows.
Lower European earnings growth, about 4% versus US 17%, makes broad full-year outperformance difficult.
AI adoption is seen as the most important European bull case, with leading adopters showing stronger earnings and trading at a discount to US peers.
Rising M&A, corporate releveraging, and savings/investment union are cited as structural supports.
Banks, defense, and powering-AI/utilities are favored sectors.
Semis are constructive, especially semicap and memory, with long-term humanoid robotics demand.
Autos, chemicals, luxury, transport, and food and beverage are least favored due to old-economy cyclicality, China exposure, and competition.
Stock dispersion is rising, favoring stock picking and analyst top picks over simple cyclical/value style bets.

Ideas

Marina Zavolock Chief European Equity Strategist, Morgan Stanley 0:51

Europe discount narrows but earnings lag.

European equities have broken out of a decade-long valuation discount range versus the US as diversification flows into Europe rise, and historically such breakouts lead to a narrowing discount over time toward single digits from around 23% now. However, much lower European earnings growth, about 4% versus 17% for the US, means she struggles to see full-year European outperformance, so the relative setup is worth watching and favors selective stock picking rather than a broad full-year relative bullish call.

Marina Zavolock Chief European Equity Strategist, Morgan Stanley 5:05

European AI adopters outperform at discount.

AI adoption is the most important bull case for Europe: leading European AI adopters, roughly a quarter of the index, are showing strong earnings and returns outperformance versus the European index and their sectors, and the gap is growing. They trade at a 27% discount to US equivalents, and the European index is skewed toward adopters rather than enablers, with productivity and demographic pressures adding low-hanging fruit as adoption broadens.

Marina Zavolock Chief European Equity Strategist, Morgan Stanley 7:37

European top picks beat on dispersion.

European equity dispersion is rising and remains below prior cycle peaks, so Europe is primarily a stock-picking market. Morgan Stanley's Europe analyst top picks have consistently outperformed the European index and the S&P, including by over 90 percentage points versus the S&P free-float market-cap weighted index since 2021 and 17 percentage points pretrade in the last year.

Marina Zavolock Chief European Equity Strategist, Morgan Stanley 8:14

European banks top model pick.

Banks are at the very top of the data-driven European sector model and the investment case is very compelling, making them the first sector non-dedicated investors ask about.

Marina Zavolock Chief European Equity Strategist, Morgan Stanley 8:25

European defense favored on rearmament.

European defense is liked structurally because of the European rearmament theme, and it also has a favorable seasonal window: defense tends to outperform strongly between January and April.

Marina Zavolock Chief European Equity Strategist, Morgan Stanley 8:40

Powering AI favors European utilities.

The powering-AI theme is a favored European thematic, and Morgan Stanley recently upgraded utilities, with a lot of investor interest in the theme.

Paul Walsh Head of Research Product, Europe 8:59

Semis favored on semicap and memory.

The semis team is constructive on semiconductors, especially the semicap space, underpinned by double-digit global wafer fab equipment spend growth in 2026 and 2027. Memory is in a super cycle with capacity constraints and unusually long order-book visibility driven by AI inference, and the long-term proliferation of humanoid robots could create over $300 billion in global humanoids semiconductor TAM by 2045 for semi names.

Marina Zavolock Chief European Equity Strategist, Morgan Stanley 10:35

Avoid old-economy European cyclicals.

Autos, chemicals, luxury, transport, and food and beverage are at the bottom of the data-driven European sector model and should be avoided: they are mostly old-economy cyclicals with high China old-economy exposure where demand is not picking up, and several face rising Chinese competition. Avoiding these low-growth sectors could help European growth and multiple expansion.

What’s Driving European Stocks in 2026

Summary

Ideas

Up Next