European equity markets have rebounded as geopolitical risks recede, with the STOXX 600 benchmark drawing $2.44 billion in inflows during the week ended August 12—the largest weekly gain since the period ending February 25.
The inflows follow a period of heightened volatility linked to Middle East tensions, which had previously weighed on investor sentiment. The European benchmark is now trading at around 15 times 12-month forward earnings, a 26% discount to the S&P 500, down from a record 41% gap recorded in November 2024. Year-to-date, European shares have gained approximately 10%, trailing the S&P 500 and MSCI World index, which are each up about 13%.
Analysts cite improving economic data and valuation appeal as key drivers. German 10-year Bund yields have risen 40 basis points this year, while U.S. Treasury yields have increased 50 basis points. The euro, which hit 13-month lows in mid-June, has since rallied around 3% to trade at $1.17, reaching a three-month peak.
Earnings momentum remains robust, with STOXX 600 companies projected to post second-quarter earnings growth of 24.1%—the strongest rate in nearly four years. Technology, which accounts for 10% of the European benchmark, has contributed to the rebound despite recent volatility in global tech markets, including a 70% surge in South Korean stocks during the second quarter followed by a 20% correction in the current quarter.
Strategists highlight Europe’s diversification benefits amid concentrated exposure in other regions. Niall Gallagher, investment manager of the European equities strategy at Jupiter Asset Management, noted that Europe offers exposure to sectors less represented in U.S. or Asian benchmarks. Meanwhile, Marina Zavolock, chief European equity strategist at Morgan Stanley, emphasized that moderate inflation supports equity performance, particularly for European banks.
The euro’s recent appreciation reflects upward surprises in European economic data relative to softer U.S. indicators, according to Dominic Bunning, head of G10 FX strategy at Nomura. However, Mark Dowding, chief investment officer at BlueBay fixed income, warned that a sharper adjustment could occur if U.S. growth slows and concerns over the sustainability of U.S. government debt intensify.
