Outlook 2026: A diversified and flexible approach to core equities markets

As we look ahead to 2026, fund managers in the European Equities strategy and the World Equities systematic strategy discuss diversification, Big Tech and market sentiment. Long-term exposure to key equity markets remains an important component of many investors’ portfolios. Core allocations combine growth and value characteristics to help maintain balance as economic and market cycles evolve.

Niall Gallagher, Chris Legg and Chris Sellers on staying flexible in Europe

Niall, Chris and Chris are investment managers, European Equities

As we look ahead, several key trends continue to shape our outlook for European equities. Broadly speaking, valuations remain appealing relative to other global markets, and European equities are far less concentrated at the top of the market -- offering investors genuine diversification away from the US “Magnificent Seven” stocks that dominate global indices.

Economic growth is likely to stay moderate - particularly in the core economies of France, Germany, Italy, and the UK - yet we still see positive drivers for some of the peripheral countries, such as Spain, Portugal, and Greece, as well as certain Nordic and Eastern European economies, supported by resilient consumption trends and manageable debt levels.

There are several long-term trends where we continue to see opportunities. European banks, in our view, still have room to run – they trade at undemanding valuations, with strong earnings potential and scope for continued shareholder distributions. In technology, we favour firms positioned to benefit from ongoing semiconductor investment, often as key suppliers to leading global tech players.

We also see enduring growth in Europe’s electrification drive – from modernising power grids to supporting renewable integration – while we have also been selectively increasing exposure to consumer businesses with distinct opportunities and attractive valuations.

Finally, as passive and hedge fund participation continues to dominate developed markets, we expect ongoing short-term volatility. However, this creates opportunities for active investors. With market efficiency declining, disciplined stock selection and prudent portfolio construction will remain crucial drivers of long-term returns.

We believe these conditions favour an active and flexible investment approach. We would point out that Europe is a market that can provide attractive relative performance, as it has this year through the first three quarters of 2025. There may be further gains, though this will likely come with continued divergence between industries.

Amadeo Alentorn on overvalued markets and behavioural biases

Amadeo is Head of Systematic Equities.

Global equity markets are currently driven more by investor optimism than fundamentals. This could well persist into 2026. However, it makes sense to remain highly flexible and alert to sudden shifts in sentiment.

During the third quarter of 2025, the market environment has been characterised by optimistic sentiment across all regions, according to our models. That optimism is linked to overvaluations, on a fundamental basis, for some stocks, especially US technology mega-caps. Our current view is that It makes sense to have a larger weighting than usual to fundamental value.

For some years we have preferred stocks with a more reasonable valuation. This seems likely to continue as we look forward into 2026. However, it has not always been the case. During 2017, we preferred stocks with a higher valuation. It is important to be dynamic, and to base positioning on an objective analysis of the market environment.

Notwithstanding the current tilt towards value, we also believe that price-based and technical signals look very attractive, given the optimistic investor sentiment. These signals typically move faster than a traditional fundamental investor might. Sentiment can change very rapidly, and it is important for investors to be able to rotate a portfolio efficiently.

There has been a wide dispersion in investor uncertainty across different geographic regions ever since the Trump Trade tariffs were introduced in April 2025. We believe it is important to search widely geographically to find the best opportunities. It is also important to hunt for opportunities further down the market capitalisation spectrum.

Behavioural investing

Why do we analyse characteristics like investor sentiment and uncertainty? Because markets are composed of people, and people are driven by psychology. Human investors tend to be swayed by behavioural biases, such as herding, confirmation bias, hindsight bias, anchoring, endowment effect, and overconfidence. Herding is the tendency of investors to mimic others, especially when faced by highly uncertain outcomes.

Confirmation bias is the tendency of investors to apportion more importance to data that supports their existing views. Hindsight bias is the tendency to perceive events as being more predictable once they have occurred. Anchoring is when investors rely on limited but familiar information. The endowment effect is where investors value more highly an asset they already own. Overconfidence bias is where investors overestimate their own abilities and the accuracy of their predictions. The latter is illustrated in the finding that about 80% of drivers think they are better than average. Of course, they cannot all be right.

We believe in a systematic approach that includes aggressive risk management. We also believe that behavioural biases can provide a persistent source of alpha. Current overvaluations are one practical consequence of behavioural biases, in our view. Investors tend to take past changes in price as having been predictable, and then overconfidently extrapolate the upswing too far into the future, as if the wave can be ridden forever. The history of markets tells a different tale.  

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