Five Charts Every European Investor Should Watch This Year

From economic growth and equity valuations to energy prices and AI-driven demand, these five charts highlight the trends in Europe worth following this year. Written by Antje Schiffler. The article, with interactive charts, can also be read here.

Key Takeaways

• Economic growth remains modest but is expected to gradually improve through 2027.

• Energy markets are shifting from crisis management to structural transition.

• European equities remain cheaper than their US counterparts. They benefit from the macroeconomic recovery, moderate inflation, low interest rates, and higher spending.

European markets have started 2026 positively: recession fears are lower, inflation is close to the ECB target, and fiscal stimulus measures are beginning to have an effect on the real economy. At the same time, various European assets are still trading at more moderate valuations than their US counterparts.

However, as stock valuations approach their highest levels in two years, investors are becoming more critical: they weigh improving economic growth prospects against higher bond yields and geopolitical risks. The story around AI that influenced financial markets in 2025 continues to dominate this year. Investors are increasingly looking at where AI applications can drive profits. Five points to watch as an investor.

Expected Growth in Europe: Gradual Recovery, Not an Economic Boom

In recent years, economic growth has been weak and uneven. In 2024, growth in the EU27 hovered around 1%, and in 2025 it only improved gradually due to energy shocks, high inflation, tighter monetary policy, and tensions over US import tariffs. However, Europe started 2026 with more stable growth prospects, albeit still modest.

The European Commission expects real GDP in the EU to grow by 1.4% in 2026 and 1.5% in 2027. The eurozone follows a similar but slightly lower growth path, mainly driven by consumer spending. Major member states such as Germany, France, Italy, and Spain are all expected to grow.

“Globally, market conditions remain challenging, but a resilient labor market, higher purchasing power, and favorable financing conditions are supporting moderate economic growth,” the EU said in its autumn forecast.

This year, fiscal policy and consumer spending are key drivers of economic growth in Europe. Policymakers increasingly recognize that demand must come from within the EU itself, rather than from exports. A modest easing of fiscal policy within the eurozone — led by higher government spending in Germany, including increased defense and infrastructure expenditures — is expected to stimulate economic growth. With falling inflation and rising wages, real incomes are also expected to increase, further supporting consumer spending.

European Equities: What Investors Should Watch

European equity markets have started 2026 under more favorable macroeconomic conditions. Expected growth has slightly improved, and the risk of higher inflation is less pronounced. Despite the ongoing threat of import tariffs, there is now greater clarity on trade terms, removing much uncertainty for investors. At the same time, the impact of fiscal support is becoming more visible, as parts of Germany’s infrastructure fund are deployed and higher defense spending across Europe provide a tangible boost to industrial growth.

This explains why European equity valuations have recovered from the sell-off triggered by the announcement of US import tariffs in April 2025. “European markets are now trading at a discount of only 1% relative to our Fair Value estimate. That is less than what has been typical for most of the past two years,” said Michael Field, Head of European Market Strategy at Morningstar.

Because European equities are trading at only a small discount compared to their Fair Value, valuations now reflect much of the positive news. As a result, investors are less inclined to buy stocks at this time, he adds.

The Euro vs. the US Dollar: From Undervalued to Stable

Tariffs are not the only challenge European exporters face in 2026. Exchange rates also play a role: a strong euro can weaken the competitive position of exporters and limit export revenues. This, however, benefits companies that focus more on the domestic market.

After benefiting from a frequently weak dollar in 2025, the euro started this year at around 1.16 against the dollar. This is significantly below its reasonable long-term value of 1.20, according to Morningstar research on exchange rates. For most of the past ten years, the euro has traded well below its real value against the US dollar. This was due to downward pressure from divergent monetary policy and concerns over the cohesion of the monetary union. 

“Although the eurozone has its own structural challenges, the relative stability of the currency, institutional credibility, and strong external balance contribute to investors holding a larger portion of their global portfolios in euros,” said Michael Diamantopoulos, Deputy Director of Fixed Income and Currencies at Morningstar. “Despite the appreciation in 2025, our valuation metrics indicate that the euro is still slightly undervalued against the US dollar.”

Future developments will be driven less by a catch-up in valuations and more by macroeconomic factors and policy decisions, according to Morningstar’s “EUR Conviction Update.” The credibility of the ECB remains a strong point, as inflation is back near target and the policy gap compared to the Federal Reserve has narrowed, reducing the risk of currency depreciation.

At the same time, Germany’s looser fiscal policy supports domestic growth. However, this also requires issuing more government bonds, keeping yields elevated. Although the eurozone’s external balance is solid, increasingly fragmented trade and higher US import tariffs pose a risk. As a result, capital inflows into productive investments will be important to maintain the euro’s resilience in 2026, the report notes.

For European investors, a stronger euro makes new dollar-denominated investments cheaper. However, it also reduces euro-denominated returns on existing dollar positions.

Beyond the energy crisis in Europe

As macroeconomic conditions stabilize, the focus of the energy sector is shifting from the crisis mode triggered by the invasion of Ukraine to long-term transformation. Russia was a major supplier of gas transported to Europe via pipelines before the West imposed sanctions following Russia’s invasion of Ukraine.

The price of natural gas has fallen considerably compared to the peak in 2022. Currently, it is determined by ample supply, moderate short-term demand, and the absence of major disruptions. At the same time, short-term prices remain sensitive to weather conditions and geopolitical developments.

TTF natural gas contracts, the benchmark for continental Europe, were trading around €30 per megawatt-hour in mid-January. This is the lowest level since spring 2024. Although the amount of stored natural gas is lower than in previous years, “imports of liquefied natural gas and pipeline deliveries—especially from Norway—continue to secure supply,” said Josephine Steppat, analyst at energy information provider Montel. “At the moment, we see no signs of a structural shortage, provided there are no unexpected geopolitical disruptions or extreme cold.” Competition with Asian countries for LNG could push prices up, particularly if temperatures drop sharply and storage levels fall, she added.

“U.S. LNG is expected to become one of Europe’s main sources of imports.” – Josephine Steppat, Montel

Strategically, the EU’s decision to gradually phase out Russian gas imports by November 2027 is crucial, she adds. “As a result, U.S. LNG will become one of Europe’s main import sources. More American LNG is already coming to Europe, and the global LNG price is increasingly determining European gas prices.”

AI and electricity demand in Europe: what does 2026 mean for investors?

Despite the growing demand for electricity, the supply this winter and in the coming years appears sufficient, adds Steppat from Montel. Although electricity demand will increase over the coming decades—partly due to AI—Montel does not foresee a structural power shortage.

The average European electricity price is likely to fall in 2026, according to Steppat from Montel. “In the short term, the trend in Europe is for electricity prices to decline. This is mainly due to falling gas prices, which is also reflected in the forward markets for the coming year. Since electricity prices in Europe are heavily influenced by gas prices, this provides some relief.”

However, the price differences between European countries remain significant. Wholesale prices in Southeastern Europe are relatively high, while the Scandinavian countries and the Iberian Peninsula generally have lower annual prices. Differences in taxes and network costs per country further complicate the picture for industrial users. Some countries with high energy prices, such as Italy and Germany, subsidize electricity for industry or plan to do so in 2026, pending approval from the European Commission.

Overall, we do not expect structural problems for electricity supply in Europe. Based on planned national capacity expansions, there should be sufficient electricity generated across Europe to meet the additional demand created by AI, Steppat says. The condition is that a more flexible system is implemented, in which surpluses are stored, electricity is released when needed, and demand can be adjusted according to the variable output of renewable energy sources.

This year, electricity demand in the EU27 plus Norway, Switzerland, and the United Kingdom is expected to increase by approximately 7% compared to 2025, and over the next fifteen years it is projected to grow at an average of 2.8% per year.

Sources: EC, Morningstar, GIE, Montel Analytics, Miguel A Amutio