The European stock market learns to live with high rates, but also without the support of the ECB?

The European stock market enters 2026 with the clear premise that The European Central Bank (ECB) will no longer be the driving force behind the increases. The market discounts stable rates for much of the year, with a deposit rate around 2%, and sees a prolongation of the pause as more likely than a turn towards cuts. This scenario changes the investment framework in Europe and shifts the focus to variables other than monetary policy.

Rate stability reduces macro risk, but also removes a key catalyst for equities. The generalized increases lose strength and the behavior of the indices begins to depend almost entirely on corporate profits, the sectoral structure and the global financial environment.

Stable rates, pressure on valuations

With rates anchored, the margin for European stock markets to rise due to multiple expansion is limited. The market assumes that the ECB will not act unless there is a clear deterioration in growth or a deflationary shock. Consequently, valuations stabilize and expected profitability is supported by real growth in results and shareholder remuneration.

This expectation of price and rate stability is being reflected in the valuation of equities. The Stoxx Europe 600 Index is trading at around 14-15 times expected 2026 earnings, slightly above its historical average, indicating that valuations are not driven by expectations of lower borrowing costs.

In this context, the progress of the European stock market increasingly depends on profit growth and dividends. According to the forecasts of several investment houses, the growth of earnings per share of European companies by 2026 It stands at rates between 8% and 12%. For example, Citigroup estimates an increase of more than 8% in the profit of the Stoxx Europe 600, and Deutsche Bank foresees a growth of between 10% and 12% in the profits of European companies.

At the same time, the role of dividends and share buybacks is becoming more important. Recent reports indicate that announcements of share buybacks in Stoxx Europe 600 companies have increased significantly, with figures in some cases double the historical average, and that dividend growth of around 5% is expected by 2026.

The euro introduces more tension

Added to this scenario is the exchange rate, an element that directly affects listed companies. The euro closed 2025 with an appreciation of close to 14% against the dollar, driven by the loss of attractiveness of the greenback and by the divergence of monetary policies between Europe and the United States.

The market consensus assumes that the crossing will exceed $1.20 starting in the second half of 2026. That level is not neutral for the ECB. The institution has pointed out on several occasions that an excessive appreciation of the euro can generate deflationary pressure and alter the balance of its monetary policy.

Direct impact on results

The currency effect has already appeared in recent earnings seasons. Industrial companies, global consumer groups, luxury companies and car manufacturers have pointed out the negative impact of the strong euro on their accounts. The blow is concentrated in the sectors with the greatest exposure to dollar-denominated exports.

Germany is the country most sensitive to this movement. Nearly 40% of its GDP is linked to the foreign sector. A strong euro puts pressure on margins, complicates forecasts and limits the ability to grow profits. France and Spain have a lower exposure, with economies more supported by domestic demand.

Divergence between central banks

The movement of the euro is not explained only by European factors. The Federal Reserve has started a cycle of rate cuts that could last into 2026. The futures market discounts new cuts in the United States, which reduces the rate differential with the eurozone.

This divergence structurally strengthens the euro. Added to this is the fiscal shift in Germany after the abandonment of the constitutional debt brake. The new framework allows for a significant increase in defense and infrastructure spending, with a direct impact on German and European growth. The main rating agencies estimate that this stimulus will add several tenths to German GDP in 2026 and more in subsequent years.

Two realities in the European stock market

The sectors with the greatest foreign exposure, such as industry, automotive, capital goods, luxury and part of discretionary consumption, are the most sensitive to the appreciation of the euro and the evolution of global growth.

On the other hand, sectors with a more domestic or regulated profile show a more resistant relative behavior. Retail banking, utilities, telecommunications and basic consumption have less direct exposure to the dollar and greater visibility of income, which reduces the impact of the strengthening of the euro on their accounts.

This sector differential is also reflected in investment flows. Data of Bloomberg show that, in an environment of prolonged high rates, investors tend to favor sectors with the capacity to generate cash on a recurring basis and maintain stable dividend policies. In Europe, that profile especially fits banking, regulated energy, telecommunications and defensive consumption.

The logic is operational, not cyclical. These sectors do not stand out for strong profit growth, but for their ability to sustain results in a more expensive financing environment and without additional support from the ECB.

A market without a monetary network

The combination of stable rates and a strong euro forces European equities to sustain themselves without explicit support from the ECB. The central bank closely observes the evolution of the exchange rate, but until a clear deflationary impact materializes, The market assumes that there will be no reaction.

The European stock market thus enters 2026 with less monetary protection and greater dependence on real factors. Market behavior no longer revolves around when the ECB will act, but rather which companies are capable of generating results in an environment where monetary policy stops setting the pace.