Deutsche Bank says the investment backdrop is improving, but investors should brace for more volatility as growth accelerates and risks build.
In its first-quarter cross-asset outlook, the bank remains positive on equities, pointing to a strong economic backdrop and earnings forecasts that still look too cautious.
It expects companies on both sides of the Atlantic to beat expectations again in the latest reporting season, helped by resilient growth and, in the US, a fresh burst of capital spending.
Europe is also benefiting from better-than-expected growth. Germany, in particular, is starting to show signs of recovery as fiscal stimulus feeds through into construction and industrial activity.
Deutsche continues to favour German stocks and sees smaller and mid-sized companies as offering catch-up potential after years of underperformance.
That said, the bank has toned down its regional positioning. After strong recent gains, it has closed its tactical preference for Europe over the US.
While US growth is expected to run faster in the near term, it also comes with greater risks, including higher bond yields, political intervention and renewed worries around the sustainability of heavy investment in artificial intelligence.
Valuations are another area to watch. European shares still look cheaper than global peers, but much of last year’s rally was driven by higher multiples rather than earnings. Further upside will depend on profits delivering, not just optimism.
On sectors, Deutsche continues to favour cyclical areas over defensives. Banks, financial services, travel and leisure and autos are among its preferred sectors, supported by improving growth and relatively attractive valuations. More defensive areas such as insurance and telecoms are less favoured at this stage of the cycle.
The central message is balanced. The outlook for growth and earnings is constructive, particularly in Europe, but the combination of higher interest rates, political uncertainty and AI-related concerns means markets are likely to be faster-moving and less forgiving in 2026.