A Strong Start from Europe… But How Much Volatility Can Investors Take?

Europe has come out of the gate strong in 2026, surprising some investors by outperforming US equities as concerns around AI spending and big-tech concentration weigh on American markets. But with valuations rising and the margin of safety narrowing, investors are asking harder questions about risk tolerance, diversification, and where true opportunities still exist. 

In our recent webinar, our analysts dug into those audience questions. Check out these insights from market strategist Michael Field, DBRS senior vice president Michael Dimler, and senior editor Ollie Smith.

A: In many ways, this is a familiar type of shock. While geopolitical conflicts can create short-term volatility, they don’t necessarily lead to lasting structural changes in equity markets. Historically, markets have adjusted and reverted over time. 

What has changed is the broader environment. The relative stability seen in the decade leading up to the pandemic has given way to a more persistent state of uncertainty. Events like this serve as a reminder of that shift. 

There may be more localized impacts, particularly in regions like the Gulf where business sentiment could evolve. But from a global portfolio perspective, this reinforces the importance of diversification rather than fundamentally reshaping investment strategy. 

A: This dynamic challenges traditional definitions. Traditionally, value stocks are expected to be cheap and growth stocks are supposed to be expensive because they have this high growth rate backing them.  

However, we use a DCF (discounted cash flow) framework, which takes into account both growth expectations and fundamentals. Some growth stocks are currently trading below their estimated fair value. 

Rather than signaling increased uncertainty, this may point to opportunity. It suggests that traditional labels like “growth” and “value” may be less informative in the current environment than a deeper, valuation-driven approach. 

A: While the financial sector overall may appear discounted, banks themselves are generally not as attractively valued as they once were. 

Performance has been phenomenal over the last year, and investors’ view of banks has shifted as well, so that’s fed into increased valuations. So while there are still select opportunities within the space, banks as a group are no longer clearly “cheap.” 

A: Defaults have been building over the past two years, and current conditions suggest we are likely somewhere in the middle of the cycle. 

Rising interest rates have put pressure on smaller companies in particular, many of which rely on larger firms with stable spending. That dynamic has been challenged recently, especially as capital allocation shifts toward areas like AI, which has been crowding out a lot of large company spending for smaller vendor companies. Combined with a still-constrained private equity exit environment, these factors could continue to weigh on private credit markets and slow deal activity in the near term. 

A: It largely depends on when loans were underwritten. Vintages from 2019 to 2021 have experienced the most stress because they were underwritten before rates started to go up after the Ukraine conflict initiation.

More recent loans tend to include stronger underwriting assumptions and greater cushions to absorb rate increases. While further rate hikes would still create pressure, the overall system is better positioned than it was in earlier phases of the cycle.

A: Europe is a great place to be in terms of defense. It hasn’t always been in the past, but a lot of things have changed in the last couple of years. The ongoing conflict in Ukraine has significantly depleted defense inventories, particularly in countries like Germany, where rebuilding could take at least a decade. 

At the same time, NATO’s commitment to increase spending is expected to drive sustained investment over the next decade. Because much of that spending will come from European countries, a significant portion is likely to benefit European defense companies.