Europe’s stock market surges 30 years later. Policy shifts unlock structural opportunities.
Rate normalization and fiscal expansion breathe new life into European financials.
Germany’s fiscal revolution and defense boom create visible demand through long-term programs.
From ASML to Enel, AI infrastructure reshapes Europe’s investment landscape.
Is Europe’s Comeback Finally Here?
European markets are experiencing their strongest rally in three decades. The MSCI Europe Index has surged 27% year-to-date in dollar terms, crushing the S&P 500’s 12% return. This is remarkable for a market that delivered just 6.8% annually over the past 15 years—barely half of U.S. equity returns.
But skepticism remains. Can Europe’s momentum actually last?
Insight Bridge AI gathered four European market specialists to assess whether this rally can continue into 2026. Their consensus: Europe’s rebound isn’t just about undervalued sectors recovering. It reflects a fundamental shift in policy architecture.
Matt Burdett from Thornburg Investment, Osman Ali from Goldman Sachs Asset Management, Julian McManus from Janus Henderson, and Davide Oneglia from GlobalData TS Lombard all project continued European strength next year. They identify three core drivers: financial sector profitability recovery from rate normalization, defense spending increases, and AI infrastructure investment.
Source: Goldman Sachs
1. Rate Normalization Revives European Finance: “The ECB’s Shackles Come Off”
The European Central Bank (ECB) effectively destroyed bank profitability after 2008 through negative rates and quantitative easing. Banks couldn’t profit from deposits and lending margins collapsed—a reality that persisted for over a decade. Recovery from the 2008 crisis and Europe’s sovereign debt crisis remained painfully slow.
Now the situation has reversed.
As rates normalize, banks can finally generate returns on deposits and lending again. Burdett notes that “European banks are receiving the best earnings outlook adjustments,” emphasizing that under normal policy rates, banks can profit from both deposits and loans.
The more significant change involves capital ratio regulation relief. Post-crisis, the ECB not only imposed high capital requirements but also mandated banks set aside 10% of annual profits as emergency reserves. European banks’ Tier 1 capital ratios climbed to 15% as a result.
This effectively strangled European banking. Wall Street’s response is positive. McManus estimates that “every 1 percentage point reduction in capital requirements could enable €100 billion in new credit across Europe,” potentially energizing the entire economy.
This isn’t just positive for bank stocks. It signals expanded credit supply throughout the European economy.
Major banks like France’s BNP Paribas still trade at single-digit P/E ratios. Before the financial crisis, these institutions recorded 15-20% ROE and traded at 2x book value.
Insight Bridge AI Investment Insight: European financials are prime beneficiaries of “rate normalization.” They possess triple momentum: capital ratio relief, accelerating loan growth, and valuation re-rating. BBVA, Erste Group Bank, and BNP Paribas merit long-term position building. Single-digit P/Es remain attractive.
2. Germany’s Fiscal Revolution and Europe’s Self-Reliance Economy: “A German Marshall Plan”
Europe’s biggest penny-pincher is opening the wallet.
Germany’s constitutional “debt brake” historically limited structural deficits to 0.35% of GDP. But facing the triple shock of Russia’s Ukraine invasion, Chinese industrial competition, and U.S. protectionism, Germany changed the rules.
Oneglia observes that “Germany’s planned physical and green infrastructure spending alone exceeds 1% of GDP over the next 12 years. The Marshall Plan was 1% of GDP annually. And this excludes defense spending, which theoretically could reach about 3% of GDP annually.”
This isn’t temporary stimulus. It’s strategic investment to build Europe’s self-reliant economic system. Investment spanning energy, defense, semiconductors, and infrastructure will continue for years, providing long-term demand visibility for industrial, construction, and defense companies.
Europe’s capital market integration is also underway.
While economically substantial, Europe fragments across 20+ different regulatory authorities. Rapid capital raising and scaling like in the U.S. proved impossible. But this system shows signs of change. Oneglia explains that “politicians are addressing these issues, including simplified methods for company formation. There’s a bigger push toward integrated capital markets.”
Insight Bridge AI’s Structural Context: Europe’s fiscal expansion isn’t economic stimulus—it’s strategic self-reliance investment. U.S. “America First” policies, Chinese industrial competition, and Russia’s energy weaponization force Europe’s transition from dependency to self-reliance. This marks the beginning of a 10-20 year structural realignment.
Source: Goldman Sachs
3. Defense: Long-Term Programs Create Visible Demand—’The War Stock Era’
Cold War 2.0 has begun, and Europe’s defense spending increases provide long-term demand for European defense stocks.
McManus mentions UK-based BAE Systems, noting “the platforms and programs they’re involved in aren’t short-term contracts related to Ukraine support. These are programs that will grow for 20-25 years.” While markets previously viewed BAE as a 2% growth company, it’s now achieving high single-digit growth with improving margins.
Ali has been overweight aerospace and defense for over three years.
He’s invested in Norway’s Kongsberg Gruppen, France’s Thales, and Germany’s Rheinmetall since before Russia’s Ukraine invasion, noting each country offers relevant companies across this theme.
However, his conviction dropped from 6-7 last year (driven by Europe’s military buildup plans and U.S. defense product demand shown in supply chain data) to about 5 this year due to elevated valuations.
Ali notes European valuation standards are more conservative than the U.S. but far more aggressive than Japan, adding “the entire sector rose 40-50%, but the theme remains important in Europe with continued upside potential.”
Insight Bridge AI Investment Strategy: Defense stocks carry valuation premiums from ongoing conflicts but still merit theme persistence bets. Leading European defense companies BAE Systems, Rheinmetall, and Safran possess 20-25 year contract-based growth. Long-term holding suits better than short-term gains. Note that in Europe, themes matter more than valuations—even at historically high multiples.
4. The China Variable and Luxury’s Dual Nature: “Will Pent-Up Demand Explode?”
One of Europe’s major growth engines is luxury, and its largest customer base is China.
Chinese consumption weakness posed maximum risk to European luxury firms like LVMH and Richemont. Opinions diverge on whether Chinese consumption will revive.
Ali notes “the cycle of overweighting/underweighting luxury companies like LVMH and Richemont typically runs 6-9 months,” adding that while sentiment improved post-June, their financial results remain below necessary levels.
McManus offers a different perspective. Raising Chinese consumption recovery possibilities, he notes “Chinese luxury sales still declined slightly, but far less than the declines we saw early this year,” indicating improvement.
Burdett goes further, emphasizing China’s “pent-up” consumption recovery potential.
He assesses that post-pandemic China experienced massive “economic lockdowns” most people don’t understand, and intensifying trade wars continue suppressing consumer sentiment. But Chinese authorities aim to elevate consumption to a larger economic share, and “there are signs things are becoming less bad.” He analyzes significant “pent-up demand” among Chinese consumers, noting European luxury brands remain preferred.
Insight Bridge AI’s China Risk Interpretation: Chinese consumption recovery follows waves, not straight lines. Time lags exist between real estate market stabilization, policy stimulus effects, and consumer sentiment transmission. European luxury brands require timing approaches that monitor Chinese consumer sentiment shifts. Short-term trading strategies closely tracking Chinese real estate and consumption data prove suitable.
Source: Goldman Sachs
5. Semiconductors and AI: ASML’s Monopoly Position—”Geopolitical Ultra-Gap”
The AI boom creates opportunities for European semiconductor companies. At the center stands ASML, rated the semiconductor equipment industry’s “super player.”
Ali observes that “lithography is the core part of semiconductor manufacturing, and Netherlands-based ASML is the only company that can do it,” though he notes Germany’s Infineon Technologies also contributes to the semiconductor ecosystem.
McManus emphasizes ASML’s monopoly position.
He states “one thing China cannot do is advanced lithography. That’s what ASML provides,” arguing ASML should be valued on post-2027 earnings when the semiconductor industry moves toward increasingly lithography-intensive process nodes.
He projects “30x P/E on 2027 EPS of €34 yields a €1,020 price, 15% above current levels,” noting ASML’s growth could accelerate further over the next decade.
McManus also raises potential U.S.-China tech regulation easing.
He suggests “it will be interesting to see if U.S. technology export restrictions ease. China holds the upper hand in trade negotiations with rare earth dominance providing leverage,” predicting that regardless of U.S. rhetoric, rare earth supply chain development timelines make Chinese cooperation essential.
Insight Bridge AI’s Geopolitical Variable: ASML holds monopoly positioning in advanced semiconductor lithography. No country, including China, can replicate this. Even if U.S.-China tech regulations ease, ASML’s strategic value persists. Medium-to-long-term buying suits post-2027 EPS acceleration expectations. Rare earth-semiconductor exchanges in U.S.-China negotiations could provide additional upside catalysts.
6. Utilities and Telecom: AI-Era Physical Infrastructure Explodes in Europe Too
The AI data center boom creates unprecedented demand for European utilities.
Burdett notes “hyperscalers will spend $550-600 billion annually building data centers, compared to $100 billion 2-3 years ago,” adding that McKinsey estimates 126 gigawatts of additional power needed for data centers over five years.
He mentions France’s leading utility EDF supplies 62 gigawatts through 56 nuclear reactors, noting “that’s less than half what’s needed for AI and non-AI data centers.”
He emphasizes viewing “power demand while undergoing energy transition,” presenting his second-largest overweight opinion on utilities. Energy transition creates more power price volatility. Integrated utilities possess customers, generation assets, and distribution, so “these companies can profit from volatility.”
He compares with U.S. companies. Italy’s Enel trades at 13x P/E while U.S. utilities trade at 22x. Enel buys back shares while most U.S. utilities issue equity to fund operations. European companies prove far more attractive across multiple dimensions.
European power market demand growth reaches remarkable levels. Total 10-year power demand from all data center contracts hyperscalers currently bid nearly equals the entire European Union’s current power demand.
Telecom also receives re-evaluation.
Burdett observes “French telecom Orange trades at about 6x enterprise value to Ebitda,” noting “telecom has been a market graveyard for years, mainly due to regulatory pressure.” But considering self-reliance, digitalization, and AI drives, monetizing all this requires good networks. He views Orange’s recent consolidation with European companies as a critical turning point for such network expansion.
Insight Bridge AI’s View on AI Infrastructure’s Physical Foundation: The AI boom extends beyond software and chips. It requires physical infrastructure: power, cooling, networks. European utilities and telecoms provide this physical infrastructure. Enel and EDF directly benefit from data center power demand. Orange gains dual benefits from industrial consolidation and AI network demand. A defensive growth stock approach considering 5% dividend and buyback yields proves suitable.
Source: Oxford Economics, Eurostat
7. Pharma: Undervalued Pipelines and Policy Uncertainty—”Buried Gems: European Pharma”
European pharma stocks offer valuation appeal and underestimated revenue pipelines, analysis suggests.
Roche stands central. Burdett notes “excitement around the stock when the company acquired some diabetes and obesity assets, but it fizzled afterward,” revealing it currently trades below 13x forward earnings—clearly undervalued.
He observes “Roche is unique among pharma companies with a diagnostics business that can inform the drug side,” noting it recently launched an Alzheimer’s blood test and holds the Alzheimer’s drug trontinemab in Phase 3 trials with 2028 data expected, yet markets don’t value these potentials.
McManus agrees: “European pharma holds significant value with underestimated drug pipelines. What makes people hesitant is policy uncertainty. The Trump administration took an unconventional approach trying to cut the Gordian knot of high drug prices and excessive healthcare costs using tariff threats and other measures. But it becomes more interesting as companies reach one-on-one deals with the U.S. providing clarity.”
Insight Bridge AI’s View on Policy and Capital Interests: European pharma undervaluation stems from Trump administration’s unconventional drug pricing pressure policies. As McManus mentions, once individual companies resolve uncertainty through one-on-one U.S. government negotiations, re-evaluation could begin.
Insight Bridge AI’s Perspective: Focus on Structural Change—Policy, Systems, and Capital
This analysis matters because it shows European markets aren’t rising due to cheap valuations but because policies and systems are changing.
Structural global capital inflows into European assets deserve attention.
Experts note U.S. market system erosion and irregular policies creating uncertainty could strengthen dollar weakness. Dollar weakness conversely acts as a catalyst raising non-U.S. asset relative returns, functioning as a dollar hedge.
Ultimately, European markets’ strong recovery emerges as an early phenomenon driven by changing policy, systems, and capital flow frameworks. Monetary policy normalization, fiscal expansion, capital market integration, self-reliant economy building, and AI infrastructure investment represent megatrends lasting 10+ years.
Europe should no longer be viewed as an “alternative market.” 2025 could mark a massive turning point demonstrating Europe deserves reconsideration as a core portfolio axis for investors.
It also favors investors seeking alternatives to U.S. markets showing excessive tech sector dependence.
European markets consist of 25% financials and 60% combined financials, healthcare, and industrials. Tech represents just 8%—compared to 35% in the U.S. This makes Europe an attractive option, particularly in environments led by rate normalization, fiscal expansion, and infrastructure investment where Europe’s sector composition may actually prove advantageous.
The movements we’re witnessing in Europe mark the beginning of a massive transition as policy regimes transform.
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