European Stocks Lead Global Markets This Month as Stagflation Risks Fade and Capital Rotates
Miles Bennett
Oil prices dropped nearly 30% after a US-Iran interim deal on the Strait of Hormuz, lifting the Stoxx 600 roughly 1.5% this month while the S&P 500 fell 1% — fading stagflation fears are driving capital from US tech into European cyclicals.
Why did an oil crash hand the lead to European stocks?
The US and Iran struck an interim deal on the Strait of Hormuz. Oil prices fell nearly 30% in a month, directly compressing Europe's inflation pressure.
This means → the "stagflation" scenario markets feared most — no growth, rising prices — has been sharply undermined, and capital is willing to re-enter risk assets.
The Stoxx 600 rose roughly 1.5% this month; the S&P 500 fell 1% over the same period — the first clear European outperformance since the Middle East conflict escalated three months ago.
Where is the money going?
In the week after the deal, banks, industrials, and media became Europe's strongest sectors. Defensive utilities and telecoms lagged.
In plain terms = money moved from "places to hide" to "places that only earn when the economy grows" — a textbook rotation into cyclicals.
Europe's lack of mega-cap AI names, a long-standing structural gap, is now seen as an advantage while US tech rallies face scrutiny. Tikehau Capital strategist Raphael Thuin said: "Buying Europe means diversifying away from tech-sector risk."
Why are institutions turning bullish together?
Goldman Sachs and Barclays have raised their European equity return forecasts. Deutsche Bank strategists explicitly shifted preference from US to European stocks.
A Bloomberg survey of 16 forecasters puts the Stoxx 600 year-end consensus near a record high.
Morgan Stanley strategist Marina Zavolock argues the Hormuz reopening is not yet fully priced in; she has downgraded energy to neutral and added bank exposure.
How strong is the valuation and data support?
The Stoxx 600 trades at a forward P/E — valuation based on the next twelve months' expected earnings — of roughly 15×, a discount of about 25% to the S&P 500.
This means → even if European stocks keep rising, they carry a wider margin of safety relative to US equities — less risk of overpaying.
The Citi Economic Surprise Index shows European data revising upward while US data is peaking. Historically, this divergence has accompanied periods of European outperformance.
On technicals, the Stoxx 600's monthly move sits in its strongest range over 25 years. Bloomberg data show July typically extends the rally; August tends to stall as liquidity thins.
Who is still skeptical?
Bank of America's latest fund-manager survey: a net 4% of respondents expect European stocks to fall over coming months — the most bearish reading since September 2024.
Indosuez Wealth Management CIO Alexandre Drabowicz notes hawkish ECB signals reduce equities' macro appeal, though banks, strategic autonomy, and defense sectors still offer "pockets of value."
UBS strategists caution that the rally's durability requires capex to broaden beyond AI into the wider economy.
What is the biggest uncertainty?
The US-Iran negotiation itself remains fluid — talks scheduled for Friday have already been postponed, and whether the deal holds is the single largest unknown.
Berenberg multi-asset strategist Ulrich Urbahn summed it up: "As long as markets keep pricing a 'peace dividend' and locking in a lower energy risk premium, European cyclical and value outperformance can continue."
In plain terms = the entire thesis rests on one assumption — that oil prices will not spike again — and that assumption is exactly the variable most in need of proof.
Content is for reference only, not financial advice.