Eyes on earnings

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Earnings hint at what we may see in 2026.

A convergence between U.S. and European earnings is likely to continue the trend of equity market returns extending beyond the U.S., in our view. And green shoots of economic activity in Europe are starting to support the earnings of companies that play well away from the AI trade.

• European earnings are set for stronger growth in 2026
• Data centre and defence spending are powering earnings
• Industrial laggards in strong position to catch up next year

Global earnings grew 10% in the third quarter of 2025 versus the same period last year¹. This growth helped propel equity markets to record highs even as investors worried about geopolitical turbulence and AI hype.

Earnings weren’t equally distributed among regions. U.S. earnings grew more than 12%, while Europe saw just 1% growth. This earnings strength lifted the price return of S&P 500 beyond Europe’s Stoxx 600, having trailed for much of the year¹.

Yet earnings growth is forecast to be much closer between the regions in 2026 – perhaps with earnings in Europe growing slightly more quickly. See the chart below. We believe this convergence could help extend the broadening of equity market returns beyond the U.S. and beyond AI.

Parts of Europe have already shown their strength this year. Spanish and Italian stocks have both gained more than 35% year to date – versus 12% for the S&P 500, and among sectors, banks have gained more than 60%, and aerospace-and-defence (A&D) stocks more than 70%².

We expect these sectors and regions to perform positively again in 2026. And we believe they may be joined by a broader selection of stocks as European earnings growth accelerates and as economic activity picks up.

Earnings convergence
12-month earnings growth estimates for global markets

Where may leaders keep leading?

There has been lots of market volatility around the AI theme in recent weeks. But the AI capex numbers remain astonishing – big U.S. tech companies are on track to spend nearly half a trillion U.S. dollars in 2025³. We expect European companies with data center exposure to keep benefitting. Earnings back this up. In their Q3 reports, Legrand said their data centre business grew by more than 30%, and Schneider Electric said that data centres would account for 24% of revenue in the coming year⁴. Utilities should also benefit from increased AI power demand, in our view. Spain’s Iberdrola raised their 2025 guidance, citing a surge in network and renewable energy investments.

We also think both the “A” and D” of “A&D” have further to run. In civil aerospace, the combination of a strong post-Covid recovery in air travel with limited number of new planes joining fleets has required older planes to fly for longer – a boost to engine aftermarket services. See the chart below. MTU – which provides servicing within the fast-growing narrow-body engine market – upgraded earnings and free-cash flow guidance, citing maintenance demand. And Safran also raised guidance due to a strong aftermarket. Most defence companies in Europe delivered solid earnings, although share prices wobbled as some market participants hoped for upgrades. We believe the consensus view is underestimating the visibility and durability of earnings, driven by increased European defence spending and a higher part of military budgets directed towards equipment.

Finally, we believe the banks can still deliver. In Q3, 78% of European banks beat earnings expectations, according to Barclays – top among sectors. Net interest income has remained resilient – supported by strong deposit and loan growth – as the European central bank cut rates, while many banks have high and attractive shareholder returns and modest valuation compared to historic averages, despite the recent strong performance.

Aircraft are flying for longer
Average age of passenger fleet (years)

Where to capture broader opportunities?

We expect the loan growth that’s supporting bank earnings to bolster the wider European economy. The chart below shows how loan growth is picking up, and European economic activity – as measured by the composite purchasing managers’ index – is expanding⁵. Manufacturing – which has been a drag on the economy for several years – is no longer contracting.

Our conversations with companies highlight these green shoots of activity, especially in the construction, trucks and mining areas. And Q3 earnings reports revealed some positive signs for those industrial companies that are closely tied to economic cycles – rather than long-term structural changes such as AI and defence spending. Sandvik – an industrial tools company – said its machinery business is now growing after a period of contraction, and Schneider Electric said the same thing about its industrial automation division.

We expect construction companies to benefit from lower interest rates in both Europe and the U.S. Several of Europe’s global construction names cited improved activity in Europe, including in France and the Nordic nations, as well as signs that U.S. construction may pick up in 2026. Truck companies, including Volvo and Daimler Trucks, said that U.S orders are improving from low levels, while they also see a strong recovery in Europe.

And mining equipment companies also had a strong quarter, as the prices for many commodities and minerals have jumped in 2025. We expect this to continue into 2026, as mining capex growth isn’t fully appreciated by the market, in our view.

Several of these sectors have lagged in recent years. But as European earnings overall converge with those of the U.S., so we expect a broader selection of European sectors to lead the way in 2026.

Loans in Europe are ticking up
Eurozone loans to private sector

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