European stocks to scale new heights in 2026, trade tensions temper loftier hopes

Reuters

5 days ago

LONDON, May 29 (Reuters) - European shares are expected to rise slightly by the end of 2025 before scaling new heights in 2026, boosted by monetary easing and higher fiscal spending, but tariff and trade uncertainties are tempering hopes for bigger gains, a Reuters poll found.
The pan-European STOXX 600 (.STOXX), opens new tab index is expected to rise to 557 points by end-2025, according to the median forecast in the poll of equity analysts and portfolio managers. That would imply a gain of around 0.9% from current levels and below a record high of 565.18 touched on March 3.
The poll was taken before a U.S. on Wednesday blocked President Donald Trump's April 2 across-the-board duties on imports from U.S. trade partners from going into effect.
The STOXX 600 has rallied nearly 9% this year, outperforming a 0.7% rise in the S&P 500 (.SPX), opens new tab, as euro area stimulus boosts long-term growth prospects and investors drop U.S. assets amid uncertainty over Washington's next moves.
The index is seen hitting a record 570 by mid-2026 and ending the year at the same level, the poll showed. Expectations were down from earlier this year when the STOXX 600 was seen rising to 610 by mid-2026.
The blue-chip Euro STOXX 50 (.STOXX50E), opens new tab benchmark index is also expected to post a further 0.6% gain in 2025 before reaching new heights in 2026 to end the year at 5,700; 5.3% up from Tuesday's close of 5,415.45.
While European stocks are benefiting from the "Sell America" theme, trade tensions and an uncertain outlook for corporates are keeping hopes of further gains in check.
The STOXX 600 slumped as much as around 2.7% on Friday after Trump threatened 50% tariffs on the EU, only to delay their implementation on Sunday, news that sent European stocks higher on Monday.
Markets have been whipsawed since Trump's April 2 'Liberation Day' tariff announcement.
"Given what we saw in early April, investors should be very aware of how quickly sentiment can shift," said Michael Field, chief equity market strategist, EMEA, Morningstar.
"We are still waiting for resolutions between the EU and the U.S. in terms of trade, and this could most certainly be a catalyst for a market shock."
As well as the potential impact on stock markets, poll respondents expressed wariness about the impact on companies.
"The outcome of trade negotiations, especially between the U.S. and Europe, will have a major impact on most European businesses. Adaptation to the new rules will take time and incur costs," said Tomas Hildebrandt, senior portfolio manager, Evli.
Despite trade jitters, Germany's planned increase in spending on defence and infrastructure and the spillover to the wider euro zone is seen as a major plus for stocks
Kevin Thozet, a member of the investment committee at Carmignac, said the fiscal impetus will last for decades, and feed into company earnings.
"After two years of stagnating economic growth, Europe appears to be finally emerging as an economic powerhouse, with Germany having taken many by surprise with the size and the speed at which its fiscal U-turn unfolded," he said, flagging the industrials sector as a beneficiary of the spending boost.
However, Marco Vailati, head of research and investments at Cassa Lombarda, said a lot of positive news had already been priced in, and the euro's recovery would also weigh.
Market participants polled expect Germany's DAX (.GDAXI), opens new tab to fall 5.1% by year-end. The index hit a record high above 24,300 on Wednesday and has risen over 20% so far in 2025.
Expectations of more European Central Bank rate cuts have also underpinned sentiment. Carmignac's Thozet said lower rates should support credit demand and push down the savings rate.
The ECB is widely expected to lower interest rates next week for the eighth time in this economic cycle by 25 basis points to 2%.
(Other stories from the Reuters Q2 global stock markets poll package)