Over the past few years, investor attention has been firmly centred on the US, where large-cap technology and artificial intelligence (AI) themes have dominated flows and headlines. That concentration has left Europe overlooked, even as many of its companies have quietly rebuilt balance sheets, streamlined operations and positioned themselves for recovery.
But we are now starting to see early signs of re-engagement. Investors are beginning to revisit the region, questioning whether it makes sense for so much of their equity exposure to sit in one market.
With valuations still at a meaningful discount and the recovery broadening across countries and sectors, we believe the setup for 2026 looks increasingly constructive for Europe.
Selective strength
We continue to see the strongest bottom-up opportunities within European small- and mid-caps (SMID). This is where valuation support and earnings recovery come together most clearly.
European small-caps are trading at 13.4x earnings, compared with 14.6x for European large-caps, 19.7x for US small-caps and 24x for US large-caps.
Many SMID businesses have faced a difficult few years − from supply-chain shortages and inflation spikes to tariff disruption and currency swings − and have emerged stronger for it.
We think 2026 could mark the point where several of those headwinds begin to ease. Companies that were hurt by tariffs in 2025 have softer comparatives and may start to recover margins as trade flows stabilise, while a softer US dollar should support European-based exporters and ease input costs.
Because many European businesses hedge currency exposures in advance, these benefits are likely to come through gradually over the year, improving visibility and profitability.
The opportunity, however, is not uniform across the market. Europe’s recovery remains uneven, which creates scope for genuine stock picking. We are seeing particular strength in parts of Europe’s periphery − notably Spain and Ireland – and signs of recovery in Germany.
Spain’s growth remains robust, supported by business-friendly regions, steady inward migration and low energy costs, thanks to renewables expansion.
Ireland continues to benefit from sound public finances, a young, English-speaking workforce and exposure to technology and healthcare clusters.
In Germany, industrial activity is stabilising and we are positioned for a cyclical upturn as demand normalises. These are not top-down calls but themes that are emerging from the bottom up.
Risks and resilience
We are always cautious about predicting macro outcomes. The reality is that inflation, rates and growth can all surprise in either direction. Rather than making forecasts, we focus on the resilience and adaptability of individual businesses. We prefer companies with strong balance sheets, good pricing power and management teams that can adjust quickly.
One area that does give us pause is the level of complacency embedded in US equities. Valuations remain elevated and ownership concentrated, with retail exposure now higher than it was at the top of the dot-com boom.
Much of the market narrative hinges on AI-related capital expenditure, but the scale of that spending – and how it will be funded − raises questions.
We are also seeing a build-up of leverage in private markets, particularly across unprofitable companies in the AI and technology ecosystem. Those are not immediate concerns for Europe but they do reinforce the importance of selectivity and valuation discipline.
For us, the key is to stay invested in businesses that can make progress regardless of the macro backdrop – companies with visibility, self-help potential and the ability to ‘make their own weather’.
We also expect merger and acquisition activity more broadly to remain a feature of the European SMID landscape. Valuation gaps between large and small companies remain wide, leaving many smaller names attractively priced and, in some cases, vulnerable to takeover.
Europe’s next chapter
Europe is still fighting for investor attention but we believe the tide is starting to turn. The combination of improving fundamentals, attractive valuations and the breadth of opportunity within Europe’s SMID universe provides a compelling backdrop.
Importantly, we see many companies capable of delivering progress under their own steam – businesses that can, as we like to say, make their own weather.
After a decade dominated by a narrow group of US giants, we think investors will increasingly look for growth in places that have been overlooked.
For those willing to venture beyond the obvious, Europe offers a deep and diverse pool of under-appreciated companies entering 2026 from a position of strength.
Hywel Franklin is head of European equities at Mirabaud Asset Management. The views expressed above should not be taken as investment advice.