3 International Stocks to Buy for 2026

Key Concepts

• International Investing: Diversifying investment portfolios beyond domestic markets, specifically focusing on European equities.
• Valuation: Assessing whether a market or stock is fairly priced relative to its intrinsic value (fair value estimate).
• Macroeconomic Uncertainty: The unpredictable nature of economic factors like inflation, growth, and interest rates impacting market performance.
• Small-Cap Stocks: Stocks of companies with smaller market capitalization, often offering higher growth potential but also greater risk.
• Consumer Defensive Stocks: Companies producing essential goods and services, generally less sensitive to economic downturns.
• Software vs. Hardware (Tech): Distinguishing between companies creating physical technology products and those developing software solutions.
• Motility: The ability of a company to avoid disruption and maintain its competitive advantage.
• GLP-1 Drugs: A class of diabetes and weight loss medications, exemplified by Novo Nordisk’s products.

Europe’s Investment Landscape in 2026: A Deep Dive

Introduction

This discussion, recorded on February 3rd, centers on the opportunities and challenges within international investing, specifically focusing on the European market. Michael Field, Morningstar’s Chief Europe Market Strategist, analyzes the current macroeconomic environment, valuations, and sector-specific opportunities for US investors. The conversation builds upon Michael’s recent 2026 Outlook webinar (link provided in show notes).

I. Macroeconomic Uncertainty & Market Volatility

Despite improvements in European macroeconomic indicators – inflation, growth, and interest rates – Michael emphasizes a rise in uncertainty. He notes January as the most volatile month he remembers, citing events ranging from political developments (Venezuelan president’s custody) to market-moving threats (potential credit card fee freezes). This volatility signals a potentially turbulent year ahead, despite positive underlying economic conditions. He highlights that even seemingly unrelated events can significantly impact market sentiment.

II. European Valuations & Performance Review

European equities experienced strong performance in 2025, mirroring gains seen in the US market. However, this performance has brought valuations up to fair value estimates, meaning markets are neither significantly overvalued nor undervalued. Michael clarifies that “fairly valued” doesn’t equate to “expensive,” and opportunities still exist within specific sectors and investment styles.

III. The Case for European Investment

Michael firmly advocates for international diversification, citing the benefits realized by investors during periods of US market shock in 2025. He argues that exposure to European markets provides a buffer against domestic volatility and access to similar end markets. While headline equity markets are fairly valued, he points to attractive opportunities within specific sectors and styles. He believes the conditions in Europe are better now than they were a year ago, potentially leading to another strong performance year.

IV. Country-Level Valuation Disparities

Europe is not a homogenous market. Michael identifies significant valuation differences between countries. While Germany and the UK remain relatively attractive, the Netherlands and Denmark currently offer the cheapest valuations. He attributes this partly to index composition, with exposure to companies like ASML (Netherlands) and Novo Nordisk (Denmark) dragging down overall index valuations, creating potential buying opportunities.

V. Small-Cap Opportunities

The gap between small-cap and large-cap stock performance, while narrowing, remains larger in Europe than in the US. Michael identifies European small-caps as the most attractive style currently, benefiting from positive momentum and a perceived strengthening of the overall economy.

VI. Sector-Specific Opportunities

• Consumer Defensive Stocks: Historically trading at a premium due to their stability, these stocks have underperformed due to inflationary pressures impacting consumer spending. However, with inflation cooling and wages rising, Michael anticipates a revival as consumers regain purchasing power and reinvest in branded goods. Companies are also increasing investment in branding and marketing to recapture lost market share.
• Technology: While US tech (hardware, particularly AI and chips) has thrived, European tech (software) has lagged. This is attributed to investor uncertainty surrounding potential disruption from AI and a lack of understanding of the sector. Michael believes this negativity is overblown, leading to attractive valuations, particularly for companies with strong fundamentals and limited disruption risk.
• Healthcare: Traditionally a defensive sector, healthcare has faced headwinds from factors like concerns surrounding vaccine sales post-pandemic, political uncertainty (RFK’s appointment in the US), and pipeline concerns. However, with these issues stabilizing and a healthy dividend yield, Michael sees potential for recovery. He emphasizes the diversification offered by companies like GSK, which have exposure to multiple areas within the pharmaceutical sector, reducing risk compared to companies heavily reliant on single drug categories like GLP-1 drugs (Novo Nordisk).

VII. Stock Picks for 2026

• SAP (Technology): A five-star, wide-moat stock offering 30%+ upside potential despite recent earnings-related declines. Its strength lies in cloud-based software outsourcing.
• Diageo (Consumer Defensive): Benefiting from a potential turnaround as inflation cools and consumer spending recovers. The appointment of a new CEO (“Drastic Dave”) signals potential for strategic changes.
• GSK (Healthcare): Offers diversification within the healthcare sector, with exposure to multiple areas beyond GLP-1 drugs, providing stability and reliability.

VIII. Key Arguments & Perspectives

The central argument is that despite fair valuations, Europe presents compelling investment opportunities due to diversification benefits, sector-specific undervaluation, and improving macroeconomic conditions. Michael consistently emphasizes the importance of looking beyond headline numbers and identifying companies with strong fundamentals and long-term growth potential. He cautions against broad generalizations and highlights the need for a nuanced understanding of country-level and sector-specific dynamics.

IX. Notable Quotes

• “There's a huge difference between being fairly valued and being overvalued. And what I would say is equities definitely aren't expensive at the moment.” – Michael Field
• “A lot of international investors even even investors themselves learned this lesson last year at around liberation day when announcements cause sudden shock waves through US markets and investors suddenly saw the benefits of being diversified across other markets.” – Michael Field

Conclusion

The conversation paints a cautiously optimistic picture of European investing in 2026. While macroeconomic uncertainty remains a key concern, the region offers attractive valuations, particularly in specific sectors and countries. Diversification, a focus on fundamentally strong companies, and a willingness to look beyond short-term volatility are crucial for success. The identified stock picks – SAP, Diageo, and GSK – represent compelling opportunities within their respective sectors, offering potential for long-term growth and value creation.