These developments create opportunities across European equities. Small and mid caps appear well positioned: they have lagged large caps for several years, trade at multi-year valuation discounts, and generate roughly two-thirds of their revenues domestically,[6] making them less exposed to US tariffs and external shocks.
This domestic orientation means they may stand to gain from improvements in European demand, infrastructure investment and easier monetary policy. Industrial companies are supported by spending on grid modernisation, electrification and AI-enabled capital goods, while defence remains a central theme as procurement and production capacity become more predictable. Financials, particularly European banks, also stand out.
A steeper yield curve supports net interest margins, and banks enter 2026 with strong capital buffers, disciplined lending standards and valuations that remain, in our view, attractive.[6]
