European stock markets concluded the second quarter on a powerful note, driven by sustained enthusiasm for artificial intelligence and an easing of Middle East tensions. This rally propelled the pan-European index to its largest quarterly gain in over five years, with the technology sector achieving its best quarterly performance since 2001.
The Stoxx Europe 600 Index closed up 0.88% on Tuesday at 641.73 points, setting a fresh closing record high after the previous peak last Thursday. For the second quarter, the index surged 10.05%, marking its most robust quarterly performance since October 2020. Among major European economies, Spain's Ibex 35 Index and Italy's FTSE MIB Index also recorded their largest quarterly gains in over five years. Boosted by a resurgence in AI-related trading, the technology sector led gains on Tuesday, closing up 2.5% and helping the broader index break through the key resistance level of 640 points.
Following the ceasefire agreement between the US and Iran, oil prices retreated to pre-conflict levels, easing inflationary pressures. This shift prompted a rotation of market funds from defensive sectors to cyclical ones. Concurrently, market attention is gradually turning towards the upcoming second-quarter earnings season. According to a report, Deutsche Bank strategists anticipate a 14% growth in European corporate earnings, which is 2 percentage points higher than the prevailing market consensus.
Technology Sector Soars Over 30% in Q2 on AI Demand
Within the Stoxx 600 Index sectors, the technology sector surged over 30% in the second quarter, achieving its largest quarterly gain since October 2001 and standing as the primary driver of the current market rally. On Tuesday alone, the sector rose over 2.5%, leading all other sectors.
Among constituent stocks, the Netherlands-listed ASML, Europe's most valuable chipmaker, closed up approximately 6.8%. Germany's Infineon Technologies gained nearly 4.4%, while France-listed chip manufacturer STMicroelectronics advanced 1.4%. Siemens Energy, an AI infrastructure equipment provider, rose 5.6% after reaffirming strong demand trends during its quarterly earnings call.
In contrast, software stocks declined against the market trend. Germany's SAP fell about 1.9%, and France's Capgemini dropped 2.9%.
Rob Lancastle, a portfolio manager at J O Hambro Capital Management, highlighted the appeal of the European market lies in its relatively reasonable valuations. He noted that investors are not overpaying for growth prospects, and European companies present significant value investment opportunities compared to U.S. tech stocks or Asian semiconductor shares, where higher premiums often come with greater downside earnings risk.
For the first half of the year, the technology sector has accumulated gains of over 25%, continuing to lead all sectors within the Stoxx 600 and is also on track to outperform its Wall Street counterpart over the same period.
Oil Price Retreat Triggers Sector Rotation
The US-Iran ceasefire agreement served as another key driver for the second-quarter performance. Following the truce, oil prices declined significantly, leading the energy sector to fall over 10% for the quarter. However, looking at the first half as a whole, the oil and gas sector still gained over 20%, primarily driven by a sharp oil price surge in late February due to conflict involving the US, Israel, and Iran, which disrupted shipping through the Strait of Hormuz.
Under a similar logic, industrial metals rose on supply concerns, pushing the basic resources sector up over 16% in the first half. The travel sector, which plummeted in the first quarter due to the Middle East conflict, rebounded nearly 20% in the second quarter as geopolitical tensions eased, marking its largest quarterly gain since January 2023. In June alone, the travel sector rose over 7%, leading all sectors. The banking sector gained over 20% in the second quarter, with a rise exceeding 6% in June.
Notably, the automotive sector has been persistently pressured by disruptions to component supplies during the Strait of Hormuz blockade, leading to a cumulative decline of nearly 20% in the first half, making it the worst-performing European stock sector this year.
Earnings Outlook and Interest Rate Path Define the Next Half
Despite the impressive gains this quarter, market views on the outlook for European stocks remain divided.
Kyle Rodda, a senior financial market analyst at Capital.com, stated in a report that current market optimism is fueled by positive signals from US-Iran peace talks and quarter-end trading activity. However, he cautioned that it will become clearer in the coming days and weeks whether this price movement is merely noise or a genuine signal. The direction will depend on the balance between geopolitical risks, uncertainty surrounding U.S. interest rates, and the earnings outlook.
This week, the European Central Bank is holding its annual central bank forum, where policymakers have warned that the oil price shock will continue to reverberate through the economy. According to LSEG data, traders currently expect European interest rates to be raised by another 25 basis points within the year. The uncertainty surrounding the interest rate path will be a key variable to watch in the second half.
On an individual stock level, French biopharmaceutical company Abivax surged over 38% on Tuesday, marking its best single-day performance in a year. This followed the company's announcement of clinical trial results that alleviated investor concerns about potential cancer side effects of its core experimental drug, obefazimod. Conversely, customer service company Teleperformance fell 11.5%, dragged down by a lowered profit forecast from its U.S. peer, Concentrix.
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