Outlook 2026: the year of bank M&As. Europe ready to accelerate earnings

Optimism on Italian equities. The best dividends will be found in the banking sector and in telecoms. In Europe, the picture is mixed, but the conditions are ideal for an acceleration in earnings in 2026.

by Andrea Scauri, manager of the Lemanik High Growth equity fund

Our expectations for 2026 are for moderate further growth in the FTSEMIB index, which we estimate at between 8% and 13%. Essentially, our thesis is that the Italian index, with financial stocks accounting for around 35% of the total, can benefit from an improvement in EPS of about 10% on average (equally weight), but that there is no further room for additional re-rating, particularly in the banking sector.

Overall, we remain optimistic on Italian equities thanks to greater political stability, narrowing bond spreads and the aforementioned expected increase in earnings for 2026. In our view, this increase in earnings will be driven mainly by the recovery in cyclical consumer goods. In general, Italian equities offer relative value, with a P/E of around 11x versus 14x in Europe. Cyclical sectors (automotive and consumer goods) are better placed to benefit from a recovery in earnings growth (also thanks to a much easier Y/Y comparison base) and, at the same time, from potential multiple re-rating. We tend to rule out such a re-rating element for the banking sector, where the P/TE multiple has more than doubled in a year (from 0.7x/0.8x to the current sector average of 1.6x).

After the first deals completed in 2025 - mainly the integration of Mediobanca into Banca Monte dei Paschi and the merger between Bper and Popolare di Sondrio - 2026 will be the year of M&A deals involving Banco Bpm, potentially Monte dei Paschi again, and consolidation deals in asset management and banca insurance. Other names that could be involved in M&A may include some industrial companies in the small/mid cap segment, in a lower-rate environment that could favour deals led by private equity. Private equity firms have been relatively absent over the past two years, precisely because interest rates have compressed expected IRRs, making M&A deals driven by financial logic unattractive.

As mentioned earlier, small/mid cap stocks depend on the interest-rate environment: falling rates historically bring greater liquidity into small- and mid-cap shares, driving the potential re-rating of stocks that currently trade at a steep discount to large caps. We are instead sceptical that the launch of funds led by the Fns can increase liquidity in this segment, mainly because of the limited "fire power" of these funds (under €1bn in total). The best dividends will still be found in the banking sector and, aware that this is a fairly contrarian view, in telecoms.

Turning to Europe, a quick overall assessment tells us that global equity markets ended November slightly negative, but since the start of December there has been a partial recovery, supported by US macroeconomic data - which reopened the door to a Fed rate cut in December - and by signs of improvement in Europe: quarterly results have generally exceeded expectations and the conditions are in place for earnings to accelerate in 2026, thanks to a gradual improvement in the macroeconomic outlook, more favourable financial conditions and fewer currency-related headwinds. In the US, meanwhile, doubts remain about the circularity, sustainability and returns on artificial intelligence investments, doubts that NVIDIA's strong results have not been able to dispel completely, as well as concerns over the resilience of consumption, which accounts for 68% of US GDP: a market correction could reduce consumer spending and slow US economic growth.

Overall, we maintain a moderately positive view on equity markets, based on three main factors: 1. We expect an acceleration in economic growth in the EU thanks to strong fiscal stimulus, particularly from Germany, with public investment and incentives boosting domestic demand and also supporting other EU countries. 2. European valuations remain reasonable (14.8x P/E FWD 1Y), while growth for 2026 should be solid and accelerating (+10% year on year, after the -3% expected for 2025 due to headwinds linked to exchange rates and the impact of tariffs), narrowing the gap with the +14% expected for the United States (MSCI USA at 22.4x P/E). 3. Investors' positioning in the EU is relatively lighter than in the United States, suggesting room for reallocations, especially if geopolitical uncertainties ease thanks to a possible resolution of the Ukrainian crisis.

We remain optimistic on gold, supported by falling US interest rates in a context of record public debt: the yellow metal rose 4% over the month, moving just above $4,160 an ounce, supported by continued strong inflows and by the fact that China remains one of the metal's main buyers, alongside Tether. In the luxury sector, after the rebound (+20% in 3 months) driven by the acceleration in the third quarter, Italian and European stocks in the sector stabilised over the last month (-1%), awaiting confirmation of the recent trends in the fourth quarter as well, despite a tougher comparison base. Visibility on 2026 depends on continued growth in spending in the United States and a return to growth in Chinese consumers. Our view on the sector remains neutral, also in light of valuations (25x P/E 2026E) already slightly above the historical average (23.5x P/E 12M FWD).

The performance of the European defence sector has been particularly weak (-10% in 1M) because of the peace talks in Ukraine, which appear to be progressing positively. However, the emerging scenario shows that the United States is preparing for a further disengagement from the Old Continent, forcing European countries to confirm (if not increase) their military investments. For this reason, following the sector's recent downgrade, we reaffirm our positive outlook on Leonardo and Avio. In addition, we see room for companies exposed to reconstruction and infrastructure themes, such as Danieli.

Our preferred themes include first and foremost Azimut, which is one of the main single-stock positions on the back of its very low valuation relative to peers, excellent inflow data and the expected spin-off of the "new bank", which is driving the re-rating of the entire group. Telecom Italia Svg, meanwhile, remains a key position thanks to a solid investment case, supported by a better competitive landscape and much more straightforward governance with the entry of Poste Italiane. We remain very selective on financials, with a preference for BPER, and we are interested in the Infrastructure segment, driven by the investments planned by the German fund for energy, digital and infrastructure renewal (Danieli Sav.).

In addition, we maintain our position in MFE (Media For Europe), following the winning bid for ProsiebenSat1. The integration between the two media companies could in fact generate significant synergies, more than doubling MFE's EBITDA on its own; the automotive sector (Stellantis) has become a core position after the very recent data showing what we believe to be the inflection point for volumes and destocking; in Defence, we have significantly increased our exposure to names such as Leonardo and Avio, with the imminent capital increase to finance growth in the United States, after cutting the position almost at the peak valuation in early October.