European equities rallied broadly on Friday, propelled by a global tech rebound and renewed enthusiasm for artificial intelligence investments. The pan-European Stoxx 600 index hit an all-time intraday high, positioning itself for a fourth consecutive monthly gain and a strong finish to July. In early trade, the index rose nearly 1%, touching a record 656.67 points, bringing its July advance to over 2%. All major national indices were higher: Germany's DAX and Italy's FTSE MIB each climbed about 1%, France's CAC 40 rose 0.9%, and the UK's FTSE 100 gained 0.8%.
The rally's core driver was a swift restoration of confidence in the global AI supply chain. The European tech sector surged more than 2%, building on strength from US markets overnight and a spike in Asian semiconductor stocks. Microsoft (MSFT.US) and Amazon (AMZN.US) reported quarterly results that exceeded expectations, along with robust capital expenditure outlooks, which alleviated deep-seated market concerns about AI's "money-burning" nature and valuation bubbles. This sentiment boosted South Korea's SK Hynix (SKHY.US) by its daily limit of 30%, Samsung Electronics by about 27%, and the KOSPI index by a rare 18%. In Europe, French semiconductor materials firm Soitec (SLOIF.US) jumped 7%, chip giant Infineon (IFNNY.US) soared 6%, and lithography leader ASML (ASML.US) gained 3%.
Florian Ielpo of Lombard Odier Investment Managers commented, "The most violent phase of position unwinding is likely behind us. From a valuation perspective, things appear more reasonable than a month ago, though not necessarily cheap. So, this doesn't signal the end of the AI trade, but it likely marks the end of the easy phase where you could buy anything and see it rise."
Beyond the macro sentiment repair, solid corporate earnings provided fundamental support for European stocks. According to LSEG data, second-quarter earnings growth expectations for European blue chips have been revised up to 20.8%, heavily boosted by surging energy company profits, which are expected to more than double. Excluding the energy sector, overall earnings growth is still estimated at 10.3%. Based on results from 225 companies and market forecasts for the rest, Stoxx 600 index component revenues are expected to grow 11.7%, potentially ending four consecutive quarters of contraction. Eight of the ten industry sectors are projected to post profit growth, with basic materials expected to see strong gains, while tech and financials are forecast for moderate double-digit increases. Real estate, consumer discretionary, and healthcare are expected to be the weakest sectors this earnings season.
On a stock-specific level, Crédit Agricole (CRARY.US) rose nearly 5% after its second-quarter profit beat market expectations. Ferrari (RACE.US) raised its full-year profit guidance, buoyed by strong demand for personalized models and robust pricing power, sending its shares higher. The Swiss National Bank reported a large second-quarter profit from foreign exchange gains and higher stock valuations. However, earnings divergences were evident. International Airlines Group, parent of British Airways, saw its shares fall 5% after a sharp drop in second-quarter profit. Siemens Healthineers (SMMNY.US) cut its full-year revenue outlook due to ongoing supply chain disruptions and slowing equipment orders in key overseas markets, causing its shares to fall 3.3%. Aerospace parts maker Melrose Industries (MROSY.US) plunged 9.3%, the worst performer on the Stoxx 600, after an accident at its California plant is expected to generate additional costs of £25-30 million in the second half of 2026.
Amid the stock market rally, falling oil prices provided an unexpected positive. With no major escalation in the US-Iran conflict and increased supply through key chokepoints, Brent crude oil remains below $90 a barrel, somewhat easing market fears of imported inflation. Nevertheless, macro uncertainties persist. Market participants are awaiting the release of the eurozone's July consumer price index (CPI) preliminary data later on Friday. Earlier data from German states showed stubborn price pressures, and economists generally expect a slight uptick in eurozone inflation. If inflation data proves stickier than expected, it could disrupt market bets on the European Central Bank's future rate-cut path, posing a challenge to the equity rally.
Throughout July, European stocks navigated severe geopolitical friction, oil price volatility, and unclear interest rate signals from major central banks, thanks to strong second-quarter results. As the month ends, investors are closely monitoring inflation trends and central bank officials' subsequent statements to determine whether the four-month rally can sustain its momentum into the second half of the year.
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