Nine months into 2026, European equities are up 11-12% and running in line with the US, after three years in which European earnings went nowhere.
The year opened as a story about artificial intelligence and American exceptionalism, with Europe left out of it. Barclays titled its 2026 European equity outlook More than Just AI, and Emmanuel Cau said what has happened since is not one thing but several tailwinds arriving at once.
"And as I always say, Patrick, if banks are fine Europe is fine."
Cau runs European and Asia equity strategy at Barclays, spent 14 years as a global equity strategist at J.P. Morgan before joining the firm in 2018, and his team was ranked second for equity strategy in the 2026 Pan-European Extel survey.
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Here are the 7 takeaways that matter.
👤 Guest: Emmanuel Cau, head of European and Asia equity strategy at Barclays, whose team advises institutional investors on how to position across global equity markets
🎙️ Host: Patrick Coffey, global head of the product management group in Barclays Research and a former deputy head of the firm's European equity research
📰 Published: 1 September 2026 on the Barclays Brief podcast feed and on YouTube (Barclays Investment Bank)
🔴 YouTube | 🟢 Spotify | 🟣 Apple Podcasts | ⏱️ 12 min
Key Takeaways
European equities are up 11-12% this year, in line with the US, and no single factor explains it Wider market leadership, an investment boom and a revival in cheap stocks arrived together
The gain has been paid for by earnings, not by investors paying more for the same earnings
The reason yields are rising matters more for stocks than the level they reach Equities have become more sensitive to swings in interest rates, which he put as "near the danger zone"
Europe is not the anti-AI trade, because much of its capital-spending revival comes from the global AI boom
German stimulus is the swing factor and implementation has barely started He sees green shoots in Germany and "pretty high execution risk"
Commodities are the one area drawing new money, in a market otherwise split between crowded banks and unloved consumer stocks
1. Why Europe kept pace
Patrick Coffey opened by asking for the single biggest reason European equities have held up against trade tensions, geopolitical uncertainty and doubts about growth. Cau said there is no single reason.
At the start of the year the market was about AI and renewed US exceptionalism, and Europe was off the radar after what he called a brief period of shine during 2025 Barclays called its 2026 European equity outlook More than Just AI, on the view that some positives for the region were being overlooked
The region has since matched the US. "Now pretty much nine months into 2026, European equities are performing pretty much in line with the US, up 11-12 percent."
Wider market leadership and the hunt for diversification away from the largest technology stocks have helped Europe, particularly through the recent sharp unwind of momentum trades Investors worked out that the US and many Asian indexes are driven mostly by technology, so those markets move together, while Europe is less correlated to the AI story
Growth has been better than the firm expected, in spite of the energy squeeze from the war in Iran. "At the same time, it's fair to say that the resilience of European growth has surprised many, including ourselves."
Europe is in the same investment cycle as the US, and it has fed straight into profits. "And like in the US, Europe is entering a manufacturing and investment boom, which has led to a strong earnings recovery in 2026 after three years of stagnation."
Cheap, cyclical stocks have led. "And finally, we are seeing a broad value style revival with commodity sectors and banks, which is key sector in Europe strongly outperforming."
2. Earnings, not multiples
Coffey asked whether Europe is entering a phase where profit growth has to take over from investors paying higher multiples for the same earnings.
Cau's answer is that the multiples never did much of the work. "In fact, European equities have largely performed in line with strong earnings."
With Barclays' fixed income strategists expecting interest rates to stay higher for longer, he does not expect valuations to lift the market from here "But yes, we are walking a fine line here." He tied that to fiscal dominance, meaning government borrowing needs shaping what central banks can do, and to a rising term premium, the extra yield investors demand for holding longer-dated bonds
"So it is very much earnings that matter for equities."
He is fairly optimistic about how long the cycle runs, and gave five reasons Growth indicators remain well oriented, particularly in manufacturing and in Germany Base effects from a year ago are turning more favorable as the drag from tariffs and a strong euro fades "Oil prices high but not too high." Energy company profits rise without the oil price hurting everyone else Emerging evidence that AI capital spending is lifting productivity and margins in some sectors Higher rates help bank profits, and banks are one of the biggest contributors to earnings growth for the European market as a whole
3. Why yields move matters
Coffey put it that investors assume higher bond yields are bad for shares, and asked what matters more, the level of rates or the reason they are moving.
Cau began with a disclaimer about his own trade. "Well, you should always take equity strategists’ view on rates with a pinch of salt Patrick."
The move matters more than the destination. "But our work showed that the reason for the moving yields and the speed of the move typically matter more for equities than the actual level of yields."
What is worrying bond investors is fiscal dominance, which he said is weakening central banks' credibility as inflation fighters The term premium has risen across the board because most developed economies are running large deficits with no strong commitment to improve the path of borrowing
The same borrowing is why higher yields have not hurt equities so far. Yields rose through the post-pandemic period alongside a strong rebound in nominal growth, and government spending pushed up both growth and inflation, which fed strong earnings On his reading, inflation that stays under control is not a bad thing for shares
What has changed is the sensitivity. Equities have become more reactive to swings in interest rates again. "So, we are probably near the danger zone here for equities."
4. The case for owning Europe
Coffey asked what the strongest argument is for a global investor to own more European equities rather than simply buying more American ones.
Cau started by conceding the size problem. "Well let's be clear here US equities weigh almost two thirds of the global equity market cap." European investors feel like they are in the passenger seat while the US drives, and he added, "And believe me, Patrick I know the frustration."
The anti-technology angle is real but it is not the whole case. Europe is less of a direct proxy for the AI story than the US and Asian markets such as Korea or Japan, and yet much of Europe's own capital-spending revival is driven by the global AI investment boom
The falling dollar is broadening where equity money goes. He linked it to the debasement trade, meaning investors selling the currency because they doubt the government's fiscal path "And equally, a weaker dollar makes US equities less attractive to foreigners."
In a world of higher-for-longer rates, Europe's tilt toward cheaper, more cyclical companies makes it less sensitive to interest rates than the US
Active managers keep raising the same complaint: US indexes are extremely concentrated in a few names, while more European stocks are participating
5. What keeps the rally going
Asked what has to happen for Europe's performance to continue over the next 12 months, Cau put earnings first.
The earnings up cycle has to keep going, because the alternative view has not gone away. "Given there are still many European investors out there who still see Europe as a value trap." His summary of that view is that the market is cheap for good reason
Coffey put it to him that second-quarter earnings in Europe were very strong. Cau said the first and second quarters were both strong, which gives hope of momentum through the rest of the year
Oil needs to stabilize and growth needs to stay resilient
Germany is the swing factor, and it is early. "We are seeing more and more green shoot emerging in Germany, but of course we are still early days in terms of implementation and there is pretty high execution risk." He said progress on German stimulus matters for sentiment across Europe
A less technology-heavy market would help Europe, and he was careful about how he put it "I'm not saying, Patrick, you have to be bear on AI to be bull on Europe, but there will be a lot of fresh capital driven by AI-related issuers that has to be absorbed in the US, both by the equity market and the rate market, which is less the case in Europe."
6. What could break Europe
Cau said the first question a European equity strategist has to be ready for is what could go wrong, and that the near-term list is long.
The main concern is deficits, which he was clear is not specific to Europe, followed by politics and geopolitics
France is the political risk he named first. "France could be a key focus point for markets into the 2027 presidential election, with negotiations on the budget starting soon."
Germany has three important local elections in September
The conflict between Ukraine and Russia, and between the US and Iran, are wild cards
Energy is a winter problem again. Gas prices have gone up for Europe and inventories are quite low going into the winter
"And finally, China remains a key market for many European exporters and a growing source of competition at home." Growth and policy there matter to European companies on both counts
7. Commodities draw interest
Coffey asked which sectors beyond the well-known European names investors are starting to warm to.
"Look, I think the market is quite polarized."
Financials, banks and industrials are the consensus position and have strongly outperformed
The consumer end of the market is where the aversion sits. Consumer discretionary is disliked and consumer staples have been very poor performers, with some money starting to come in but still very little interest overall
"One area of emerging appetite seems to be commodities." He put the reason as a weaker dollar, still-resilient growth and inflation risk, with investors looking for a trade that gives them a hedge Barclays is putting more interest on the commodity space itself right now
Bonus Insights
Coffey framed the timing of the conversation around the calendar. "Investors will be returning from the beach to their Bloomberg terminals, so it felt like a good time to catch up and take stock of where markets stand."
Cau's aside on the fashion for rate forecasting: "And these days everybody seems to have become a fixed income expert."
Coffey told listeners that commodities have come up repeatedly on earlier episodes of the show and to go back and listen to those
Coffey closed with his own summary, which put the burden of proof on the recovery. "The challenge from here, however, is proving that this recovery has further left to run."
Cau's bottom line is that Europe's year has been paid for by profits rather than by rising valuations, and that the rally continues only for as long as the earnings cycle does.
Books & Resources Mentioned
More than Just AI (Barclays' 2026 European equity outlook, which Cau said was titled provocatively on the view that positives for the region were being overlooked)
Equity Market Review: US cools, Europe heats up (The Barclays research note the show points clients to on the US-versus-Europe performance gap discussed here)
Earnings Season Watch: Learnings from Q2 earnings – higher for longer (Barclays' write-up of the strong second-quarter European earnings Coffey raised)
European Equity Strategy: France – Deficits, elections and déjà vu (The team's work on the French budget and the 2027 election, the risk Cau named first)
Metals & mining: meltdown or opportunity? (One of the earlier commodity episodes Coffey told listeners to go back to)
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