European Equity: Outlook 2026
December 2025 | Tom O'Hara | Jamie Ross | David Barker
The equity market has a tendency to fixate on a particular theme or narrative. Investors' tendency to crowd and over-extrapolate can drive valuations to unsustainably high levels.
AI is the theme du jour and has been since the 'ChatGPT moment' back in late 2022. We are not 'calling the end' to this trade and have many companies in the portfolio exposed to this theme. However, the space is becoming increasingly noisy and we are starting to have some doubts over how revolutionary AI can be in a timeframe that will sustain shorter-term investor interest. The lesson from the dotcom bubble was that equity investors were right to assume that the internet would change the world, but they had overestimated how quickly this would happen.
We are looking for more nuance in our thematic exposure and feel far more comfortable managing a portfolio with exposure to a balance of niche (less crowded) themes over large, more consensual ones.
A nuanced view of European exposure
One of the joys and drawbacks of investing in Europe is that it consists of over 40 different countries.
We believe investing in Europe requires selectivity, given the wide range of growth outcomes, government stability and fiscal positions across the continent. The dominant positive narrative in Europe in 2025 was the change of government in Germany and excitement about loosening of its fiscal straight jacket and defence/infrastructure spending. We are excited about Germany's potential to drive growth, and expect to see growth accelerate in the second half of 2026. On the flipside, sentiment in France is extremely negative, driven by parliamentary paralysis and the lame-duck presidency of Emmanuel Macron and a clear drive to the fringes. We think there are other clear positive narratives in Europe that do not get enough attention. Greece is flourishing after a long recovery from the eurozone crisis, with a stable business-friendly government, strong infrastructure investment, and revitalised banking system driving attractive GDP growth. Spain, despite having an unpopular socialist government, had higher GDP growth than the US in 2024, driven by tourism and strong private consumption. Ireland remains a portal for US companies into Europe driving significant budget surpluses and ability to invest. We are increasingly excited about the prospects of Eastern Europe in the event of a hoped for Russia-Ukraine peace settlement. Europe is not created equal.
The long-awaited mining capex cycle has arrived
As we wrote in one of our blog posts in October, strong price gains in gold and copper in 2025 will shift the long-entrenched mining sector mindset of "capital discipline" to one of growth in the coming years.
Sportswear stands out within consumer categories
We see a strong growth opportunity in sportswear over the medium term. This is a sub-sector where growth tends to be very innovation-cycle driven. Nike has had a tough few years, with key brands (Jordan, Air Force 1, Dunk) at a mature stage in their development, but growth is beginning to re-emerge.
Affordable healthcare
In 2025, the Trump administration had a strong focus on reducing US drug costs and in Europe governments seek healthcare cost efficiency with growing budget deficits. Today, 90% of the volume of medicines consumed are generics and biosimilars, but at only 10% of the cost – providing significant value for the healthcare system. Over the next decade, more than USD 300 billion of complex biologic drugs will come off patent, driving a significant launch wave of biosimilar drugs.
Chart: US manufacturer gross prescription drug prices as a percentage of prices in selected other countries, all drugs, 2022
Source: Assistant Secretary for Planning and Evaluation (ASPE) U.S. Department of Health & Human Services, International Prescription Drug Price Comparisons: Estimates Using 2022 Data, published on February 2024. Authors’ analysis of 2022 sales and volume data from IQVIA, “MIDAS,” webpage, undated (run date May 19, 2023).
NOTE: All countries refers to all 33 OECD comparison countries combined. Other countries’ prices are set to 100. Biologics were excluded from unbranded generics. Only some presentations sold in each country contribute to bilateral comparisons. Brand-name originators and Unbranded generics reflect IQVIA’s assignment of drug products in individual countries.
Lessons from 2025?
Understanding the equity market structure is critical to fully exploiting its opportunities. Short time horizon, tightly risk-managed money now dominates (think multi-strat hedge funds or "pod shops" as they are colloquially known). Active long-only funds account for only around 10% of daily trading. This shift has become more pronounced in recent years and is manifesting in outsized share price reactions to quarterly results and short-term "earnings momentum" leading to often unjustified valuation extremes (if judged through a longer-term perspective). Market reflexivity and human psychology means extreme narratives can take hold (and dissipate) quickly; a quarterly earnings "miss", followed by a share price "slump" (Bloomberg parlance) can quickly be extrapolated into a pessimistic narrative of structural or even existential consequence.
2025 was a banner year for market structure-driven volatility, with the Q2 results season in Europe the choppiest in over 15 years when measured by results day share price movements in stocks.
The implications for long only strategies are not fully appreciated in our view: higher short-term volatility is now hard wired into the system. Truly active strategies will deviate from the index to a greater extent over short-term periods than they have historically. Perhaps that is too much to stomach for some and it is understandable: volatility, or risk appetite, is ultimately a personal and professional remit-driven consideration. However, on a fundamental basis, short-term volatility and heightened dislocation is a boon for long-term performance prospects, assuming the right team process and culture is in place to diagnose the short-term melodrama and exploit it, without succumbing to fear and short-term performance protection.
Which "dislocations" do we see today?
Artificial intelligence
This is the big one. And it feels systemic. If the "bubble" pops, the market could tank, the wealth effect propping up US economic sentiment (or at least wealthy consumers) will collapse. Trump will be livid. So what is our view? Large language models (LLMs) – which are enhanced pattern-matching tools – do some wonderful things and we are definitely not AI-deniers. Now, with that preface, we do see a growing number of concerning flags that the market has completely lost its mind over AI and its implications for society. Stocks are going up by hundreds of billions in market cap in a single day on the back of partnership announcements with OpenAI, a business which still only prints around USD 13 billion in revenue and whose main source of cash flow is regular equity rounds.
It is important we do not become the new dotcom doomers, many of whom lost their investment jobs before they were proven correct. And there are some important distinctions between the AI buildout and the dotcom bubble relating to balance sheets; the hyperscalers actually have them. Furthermore, AI is just one driver of structurally growing electrification trends, which is our preferred exposure.
Booze will come back
In addition to the 'AI losers', we have started to build up a small exposure to spirits. The industry has had a tumultuous five years with a boom-bust cycle driven by strong demand and pricing during Covid followed by destocking and pricing pressure in the years that followed. Equity valuations of the spirits companies have fallen to multi-decade lows and medium-term growth is now seen as structurally challenged because "young people don't drink" etc. We think the macro environment of the last couple of years – in which inflation has pressured disposable incomes – has a big role to play in the volume slowdown and in time this can reverse. We see this as a good moment to start to think about the potential recovery versus very low expectations.
Tom O’Hara, Jamie Ross and David Barker are portfolio managers investing in European Equity strategies at GAM Investments.