European Equities: constructive momentum under ECB patience

European equity markets remain in a constructive phase in mid-February 2026, with the STOXX Europe 600 and several core benchmarks trading near record highs, supported by resilient earnings, moderating inflation and a European Central Bank that continues to signal patience.

The ECB’s decision to keep policy rates steady, alongside inflation stabilising close to target after last year’s disinflationary trend, has anchored bond volatility and compressed risk premia, creating a supportive backdrop for equities without reigniting overheating concerns. The DAX continues to exhibit relative strength, benefiting from its heavy weighting in industrials, capital goods and globally exposed exporters that are leveraging stabilising global demand and a recovery in manufacturing expectations, while the CAC 40 has been underpinned by luxury and quality industrial franchises delivering pricing power and margin resilience despite softer global consumption pockets.

The FTSE MIB remains higher beta, sensitive to domestic growth and banking sector performance, but continues to benefit from solid credit conditions and stable sovereign spreads, whereas Spain’s IBEX shows steady performance on the back of financials and improving domestic demand dynamics. From a macro perspective, the euro area growth profile remains modest but positive, consistent with a soft-landing scenario rather than recession, with labour markets still relatively tight and services activity offsetting weaker manufacturing prints; this backdrop supports mid-single-digit earnings growth expectations for 2026, which justifies current valuations provided bond yields remain contained.

Sector leadership has broadened beyond defensives into financials, industrial cyclicals and selective technology, indicating improving market breadth rather than a narrow rally, though positioning is no longer light and tactical pullbacks should be expected around data surprises or geopolitical headlines. Key risks include renewed energy volatility, external trade friction, or a reacceleration in core inflation that could challenge the ECB’s current stance, but absent these shocks, liquidity stability and earnings visibility argue for maintaining an overweight bias to European equities versus cash, with a preference for quality cyclicals, large-cap industrial champions and well-capitalised banks while keeping hedges in place given elevated index levels. Overall, the strategic call remains cautiously bullish: momentum is supported by policy stability and earnings delivery, yet upside from here is likely to be more selective and rotational rather than broad-based multiple expansion.