European stocks are coming out of three positive years. The Stoxx Europe 600 gained 13% in 2023, 6% in 2024, and 17% in 2025. The broad European index even had the luxury of beating the S&P 500 in 2025, only the second time in 10 years.

In contrast, in 2025 US stocks posted their worst underperformance versus the MSCI World since 2009.

This momentum has continued at the start of 2026. The first sessions of January allowed several European indices to set new records, before Donald Trump came along and rocked the boat with his claims over Greenland.

However, beyond the short-term volatility created by the US president - which everyone is now used to - strategists are fairly confident about 2026. Those at Goldman Sachs, for example, expect 8% growth for the Stoxx 600 in 2026 (in total return terms, including dividends).

Multiple expansion

What is unusual over the past three years is that the rise in European stocks has taken place without any increase in earnings per share. In other words, the rally of the past three years is explained almost entirely by a higher valuation multiple. The Stoxx 600 forward P/E has risen from 12.5x in early 2023 to over 17x in early 2026.

 

Stoxx Europe 600 price in white and the evolution of the valuation multiple (forward P/E) in blue over three years. Source: Bloomberg

The lack of earnings growth at the index level nonetheless hides wide disparities. Luxury goods and the auto sector have seen results fall, while banks have posted very strong earnings growth.

Historically, Europe was seen as a region where stocks were undervalued. Europe was value. At over 17x 2026 earnings for the Stoxx 600, that is no longer true.

It is therefore likely that the valuation engine is somewhat exhausted. Henceforth, earnings growth will be needed if European indices are to continue their run.