Europe is emerging from a period marked by economic stagnation, geopolitical tension, and the disruptive rise of artificial intelligence. The region’s story is one of cautious optimism, strategic intervention, and the search for sustainable growth. Deutsche Bank Private Bank’s CIO for Germany, Ulrich Stephan, outlines what investors should watch out for in the year ahead.
As 2026 gets underway, uncertainty continues to prevail. Beyond the unpredictable geopolitical backdrop – including the US abduction of Venezuelan president Nicolas Maduro and ramped up rhetoric surrounding Greenland – investors and policymakers across Europe are left questioning whether the region can harness its strengths to thrive amid volatility, or if persistent challenges will hold it back.
The year ahead is shaped by a blend of cautious optimism, strategic intervention, and the ongoing search for sustainable growth, as Europe navigates economic recovery, structural headwinds, and the disruptive rise of artificial intelligence.
Cyclical recovery and structural challenges
Europe’s economic prospects for 2026 are shaped by a blend of cyclical recovery and structural challenges. After years of generally sluggish growth, we expect Germany’s economy to improve with GDP expanding by 1.2%, which should provide support to overall European growth at 1.1%. France, Italy, and Spain are also set for incremental gains, though the pace lags that of the US and Asia.
The main drivers behind this outlook are expansionary fiscal policy and targeted investments in Europe, especially in infrastructure, defence and climate neutrality. Germany’s 500-billion-euro special fund is an example of this, promising a boost to manufacturing once funds are deployed, and a ripple effect across neighbouring economies such as the Czech Republic and Poland.
However, we believe improving domestic economic flexibility remains crucial to foster entrepreneurial initiatives and create an investment climate that enhances productivity. Meanwhile, the growth-enhancing impact of previous rate cuts should gradually materialise. We believe the European Central Bank is likely to keep its deposit rate at 2% until the end of 2026.
Europe lagging in the global AI race
Artificial intelligence (AI) is a global growth engine, but Europe’s role in the space is more subdued. While technical expertise is present, investment in AI technologies remains significantly lower than in the US and China. Innovation is often outsourced, and persistent trade barriers within the single market dampen potential. Nevertheless, AI’s impact is felt in sectors like construction (data centres), utilities (electricity demand), and industrials, with the promise of potentially long-term productivity gains.
In Europe, both short- and long-term AI-driven growth impulses are likely to be weaker than in the US. This is less about technical know-how and more about significantly lower investment in AI technologies and the frequent outsourcing of innovation monetisation to foreign companies. Persistent trade barriers within the single market further dampen growth potential, while structural reforms are progressing too slowly.
Ulrich Stephan notes, “The EU still does not operate as a true single market; trade barriers within the EU are significant. Estimates from the International Monetary Fund (IMF) suggest that these barriers are equivalent to an average tariff of about 44% for traded goods and 110% for services. Lowering these barriers would provide a significant boost to Europe’s potential growth.”
Our focus for Europe in 2026 will therefore be on monetary and fiscal measures that should support growth in the short and medium term.
Navigating state intervention
Overall, we expect the trend toward greater state intervention in Europe and the US to continue in 2026. In the US, this policy appears particularly ambivalent. On the one hand, the current administration seems to fully support free-market forces with its deregulation and tax relief measures – meaning less government. On the other hand, it intervenes in the affairs of individual large corporations.
In Europe, US policy is being sharply criticised in some quarters. Yet Europe is hardly immune to the temptation of state intervention. In Germany alone, industrial policy measures in the form of financial aid and tax incentives for companies have risen significantly in recent years – from around 40 billion euros in 2021 to more than 65 billion euros in 2024.
Efforts to strengthen Europe’s position in strategically vital sectors – ranging from semiconductors and hydrogen to pharmaceuticals – reflect a broader policy shift toward targeted intervention. Yet, as with any large-scale initiative, the risk of resource misallocation remains significant. Policymakers must weigh the potential for backing technologies that may not achieve widespread adoption, or supporting industries where global competitors, such as China, can deliver mature products at far lower cost.
In this evolving landscape, the challenge lies in balancing ambition with discipline, ensuring that intervention fosters innovation and resilience rather than inefficiency. In our view, industrial and economic policy should refocus on providing a regulatory framework for business, promoting research and development, and ensuring defence readiness and supply security. Against this backdrop, investors are encouraged to maintain a vigilant stance, closely tracking the evolving landscape of policy interventions and their tangible effects on the real economy.
European bonds – a return to the status quo?
After a period marked by volatility and inversion, yield curves in both Europe and the US have returned to a more traditional shape, with long-term bonds once again offering higher yields than their short-term counterparts. This normalisation, anticipated in previous outlooks, signals a renewed era of stability in interest rate regimes across both regions. For investors, the implications are clear: duration risk is being rewarded, and the prospect of positive real returns – after accounting for inflation – has re-emerged as a tangible opportunity.
Retail investors, who typically favour bonds with maturities of five to ten years, now stand to benefit from improved return prospects. As we look ahead to the end of 2026, the steepness of the yield curve is expected to persist on both sides of the Atlantic. Forecasts point to yields of 4.15% for 10-year US Treasuries and 2.70% for comparable German Bunds, while 2-year government bonds are projected to yield 3.50% in the US and 2.00% in Germany. In this environment, disciplined allocation and active risk management will be key as investors navigate a landscape where fixed income is once again a compelling component of diversified portfolios.
Earnings growth
Global earnings are poised for growth in 2026, in our view. Consensus forecasts point to double-digit growth in earnings per share (EPS) across the US, Europe, and Japan, with analysts projecting increases of around 13–14%.
This acceleration is not confined to technology giants; a widening array of sectors is now contributing to the positive earnings trajectory, supporting greater stability and resilience in corporate profits.
Nevertheless, technology remains the main driver of growth – especially in the US where the ongoing boom in AI continues to reshape the investment landscape. The ripple effects of AI are extending well beyond the tech sector, fuelling demand in construction (driven by the proliferation of data centres), utilities (reflecting surging electricity needs), and industrials and materials along the supply chain, which may have a positive impact for Europe as well. Robotics, too, is entering a new phase, with AI-powered humanoid robots beginning to find applications outside traditional factory settings, including education and healthcare.
A marked recovery in the private realm
Beyond the public realm, Europe’s private equity landscape has entered a phase of renewed momentum. The recent surge in US investor participation – now approaching half of all transactions – signals a vote of confidence in the region’s private markets. Following a notable 10% uptick in deal activity during 2025, this positive trajectory is expected to persist into 2026, highlighting the growing appeal of European private assets on the global stage.
Infrastructure investment stands out as a central theme, spanning sectors from energy and transportation to social infrastructure. These investments offer the dual benefits of portfolio diversification and the potential for stable, long-term returns, often underpinned by contractual revenue streams and high barriers to entry. Yet, investors must remain mindful of inherent project and development risks, including the prospect of unprofitable ventures.
The demand for infrastructure capital is set to remain elevated, driven by both public and private initiatives. Germany’s recently approved 500 billion euro special fund targeting transport, energy, and sustainable transformation, exemplifies the scale of commitment required. At the same time, the global push for digital and physical infrastructure – accelerated by advances in AI – calls for collaboration between public-sector sponsors and private capital providers to bring these transformative projects to fruition.
Diversification and risk management are key
Diversification and active risk management remain core elements of a successful strategy. We believe investors should stay invested while adapting their strategies dynamically to changing conditions. Waiting for the perfect re-entry point often means missing the strongest upward moves.
Europe faces persistent challenges – geopolitical risk, inflation, and structural barriers – but also compelling potential opportunities in infrastructure, AI, and alternative assets. In a world where uncertainty is the only constant, Europe’s ability to navigate change will define its success in the year ahead.
Learn more about Deutsche Bank’s ten key investment themes for the year ahead in our PERSPECTIVES Annual Outlook 2026: Investing for tomorrow.
