European equities are grappling with underperformance in the wake of the Iran conflict and its resultant energy shock, although signs suggest that selling pressure may be nearing exhaustion. The ongoing geopolitical tensions are likely to leave a lasting impact on the European economy, with higher energy prices expected to dampen corporate earnings growth and sustain elevated inflation levels. This environment is prompting central banks to adopt a more cautious monetary policy, further contributing to deteriorating global growth forecasts.

Current market performance reflects this mixed sentiment, with the UK’s FTSE 100 slightly up, while France’s CAC 40 and Spain’s IBEX 35 are down. Notably, the luxury goods sector, including Kering and Hermès, faces significant downward pressure due to disappointing earnings, contrasting sharply with the technology sector, where companies like ASML are benefiting from sustained demand driven by AI trends.

A key takeaway for investors is the ongoing sector rotation, highlighting the importance of selective positioning in a market characterized by divergence in performance and sentiment. As inflation data stabilizes, the likelihood of aggressive monetary policy shifts appears reduced, suggesting a defensive yet cautiously optimistic outlook for European equities.

Source: xtb.com