European stock market outlook for 2026: institutions are bullish on further upside potential, optimistic about banks, renewable energy, and German stimulus beneficiaries.

After experiencing its best year since 2021, analysts and strategists predict that the European stock market still has further room to rise in 2026. Specifically, sectors that performed well last year are generally expected to continue to strengthen. The banking sector, which has been the best-performing sector so far in 2025, is expected to deliver impressive results again, with Morgan Stanley and Barclays Bank both listing it as their top picks. Themes such as increased defense spending, renewable energy, and electrification are also expected to continue to be bullish. Many brokerages have also pointed out in their stock selection strategies for the new year that companies benefiting from Germany's economic stimulus policies will be another major investment highlight, as well as companies with clear self-improvement strategies. Below are some of the top European stock picks recommended by analysts for the new year: Morgan Stanley Led by strategist Marina Zavolock, Morgan Stanley predicts that the European stock market in 2026 is expected to continue to rise with the help of the "broadening scope of the US economic recovery." The US market contributes about 23% of weighted revenue to European companies, and as US corporate earnings growth exceeds market expectations, European companies will significantly benefit from favorable tax and regulatory policies. Morgan Stanley's top sectors for 2025 include banking, followed by tobacco and defense sectors. Core recommended stocks include Santander Bank, Lloyd's, Siemens Energy, Centric Group, Fiserv Group, ING Group, Prosus NV, Rheinmetall, ENGIE SA, French Industrial Bank, and Airbus. UBS For the first time in three years, UBS predicts that European corporate earnings will recover in 2026. Strategist Gerry Fowler said, "The most attractive investment opportunities stem from Europe's economic transformation and structural investment boom." He pointed out that the renewable energy sector stands out prominently with support from over 2 trillion euros (approximately $2.2 trillion) in investments in grids and clean energy. Companies related to electrification will also benefit from favorable regulatory policies and continued infrastructure investment, with core stocks including EDP SA and Solaria Energia y Medio Ambiente. Fowler also said, "Domestic policy dividends are driving Europe's emergence of a new batch of global leading companies in renewable energy, electrification, defense, and infrastructure." He emphasized that companies like Acciona SA, Rexel FP, and Prysmian SpA are expanding internationally by leveraging their local advantages. Meanwhile, the bank said that the banking sector, with strong capital strength, accelerating loan growth, and attractive valuations, has good prospects for development. Barclays Bank Led by strategist Emmanuel Cau, Barclays Bank states that the artificial intelligence (AI) theme in 2026 may still "control the pulse of the stock market." However, the European stock market will also benefit from Germany's policy stimulus, and under the...