European stocks regain momentum as stagflation risks decline economy

European stocks are heading towards a strong performance during the second half of the year, with the decline in oil prices and the decline of concerns about energy supplies from the Middle East, which has strengthened investors’ bets on improved economic growth and a decline in inflationary pressures, according to Bloomberg.

The Stoxx Europe 600 index rose by about 1.5% this June, after America and Iran reached a preliminary agreement that allowed the reopening of the Strait of Hormuz, while the American Standard & Poor’s 500 index fell by about 1% during the same period.

Bloomberg indicated that oil prices fell by about 30% over the past month, an indication that the markets do not expect a new major escalation in the conflict, which supports the sectors most closely linked to economic growth, such as banks, car companies, and luxury goods.

“The justification for investing in Europe has returned again,” said Rafael Tuen, head of financial market strategies at Tico, adding that European markets provide diversification away from the risks associated with the American technology sector.

Bets on growth and cyclicality

Major financial institutions, including Goldman Sachs and Barclays, raised their expectations for the performance of European stocks this year, while a survey conducted by Bloomberg showed that the average expectations of 16 analysts indicate that the Stoxx 600 index is close to its record levels by the end of 2026.

European economic data also began to show a relative improvement compared to the American economy, as the Citigroup Economic Surprises Index indicated an improvement in European data at a time when there are signs of a slowdown in economic momentum in America.

This was reflected in investors’ trends, as banking, industrial, and media stocks led gains during the week that followed the announcement of the initial agreement between Washington and Tehran, while the attractiveness of energy, utility, and communications stocks declined.

Attractive reviews despite continued caution

Despite this improvement, some investors remain cautious about the prospects for the European market, with relatively high energy costs continuing to impact economic activity. A Bank of America survey showed that a net 4% of fund managers expect European stocks to decline in the coming months, which is the most pessimistic position since September 2024.

European stocks remain less expensive than their American counterparts, as the STOXX 600 index trades at a future earnings multiple of 15 times, at a discount of approximately 25% compared to the Standard & Poor’s 500 index, according to data reported by Bloomberg.

Ulrich Urban, head of multi-asset research and strategies at Berenberg, believes that the outperformance of European stocks may continue in the short term as long as markets continue to price in what he described as the “peace yield,” which supports cyclical sectors and limits energy-related risk premiums.