Strong corporate earnings reports and falling oil prices have highlighted the value of European stocks as a hedge against global tech volatility, prompting capital to flow back into the region.
Data from FTSE shows that European corporate earnings are expected to grow by 22% year-on-year in the second quarter. Despite persistently high energy costs, companies have posted their best profit growth since 2022, a period when global markets were recovering from the COVID-19 pandemic.
Where to focus
Marina Zavolok, European equity strategist at Morgan Stanley, described the current quarter as a "stellar earnings season" for European markets, with almost all sectors showing positive profit performance. Data indicates that since the Iran conflict erupted in late February, exchange-traded funds (ETFs) tracking European stocks recorded their first monthly net inflows in July. BlackRock also reported that its European equity products attracted $4.4 billion in new funds in July, calling this a "counter-trend" shift as investors move away from volatile chip-making stocks.
Buoyed by strong earnings, the pan-European Stoxx 600 index has repeatedly hit new all-time highs over the past week. Major national indices, including the German DAX, UK FTSE 100, French CAC 40, and Spanish IBEX 35, have also surged to record levels. Zavolok noted that the robust earnings of European companies in recent weeks have significantly boosted demand for portfolio diversification. Investors say the global semiconductor sell-off in July has redirected capital toward markets like Europe, whose returns are less correlated with volatile tech and AI stocks.
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The banking sector has been one of the standout performers in Europe's second-quarter earnings season. Surging oil prices have driven up interest rates, while market volatility has boosted trading revenues, benefiting banks significantly. BNP Paribas SA reported a 33% jump in quarterly profit, and UBS Group AG saw a 17% rise in net profit to a record high, with both banks' growth driven by trading income. The Stoxx 600 Banks index has outperformed the broader market this year, gaining over 21%, compared to the Stoxx 600's 11.5% rise.
European tech stocks have also been a key contributor to earnings growth, with chipmakers ASML Holding NV and Infineon Technologies AG both raising their revenue forecasts for the remainder of the year. The energy sector, boosted by high oil and gas prices, has also added significantly to overall profit growth in the second quarter.
Hugh Gimber, global market strategist at J.P. Morgan Asset Management, said: "If European corporate earnings can stabilize at around 15% growth by 2026, it would be an extremely impressive result for a market long doubted for its lack of profit growth." He added that this outlook is driving ongoing capital reallocation into European stocks.
For much of the second quarter, European stocks underperformed U.S. equities. The Iran conflict led to a de facto blockade of the Strait of Hormuz, causing oil and gas prices to spike. Traders believed that Europe, heavily reliant on energy imports, would suffer severely. However, signals from both Iran and the U.S. about seeking an end to the conflict have pushed oil prices below $90 per barrel, improving Europe's economic outlook and attracting investors back to European assets.
Beata Manthey, head of European equity strategy at Citigroup, said the easing of Middle East tensions means Europe has likely avoided the worst-case energy price scenario, which has "drawn in a lot of capital" to European stocks. She added: "International investors are turning bullish on Europe again, as positioning there is a hedge against AI-driven bets."
Despite higher energy prices, the eurozone's economy grew by 0.4% in the second quarter, beating expectations, which has further boosted investor appetite for the region.
While U.S. corporate earnings remain strong, with a 50% year-on-year surge in profits, European earnings still lag. Even after the recent rally in European stocks, the S&P 500 has still slightly outperformed the Stoxx 600 this year. However, Vera Fehling, chief investment officer for Western Europe at Deutsche Bank Asset Management, noted: "For a long time, European corporate earnings growth was essentially stagnant. Now, the diversification and hedging value of European stocks has increased significantly."
The current inflows into European stocks remain below the historical peak seen in early 2026. Emmanuel Makonga, European equity strategist at Barclays, said international investors are still selective in their European allocations, with bank stocks being the primary focus. Makonga noted that the capital flowing into European stocks in early July was more driven by a shift out of U.S. markets than by active bullishness on Europe. However, as the earnings season progresses, "we can confirm that beyond simple diversification, fundamental improvements are supporting broader capital deployment, and investors are willing to increase their exposure to the European market again."
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