The EuroStoxx 600 posted its strongest quarterly performance since 2020. Improving prospects for the European economy, declining oil prices, expectations that the ECB will keep interest rates unchanged, and rising corporate earnings continue to support European equities. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Banks are raising their forecasts for the EuroStoxx 600.
- Corporate earnings expectations continue to improve.
- Rotation out of US equities is supporting European markets.
- Consider long positions in the EuroStoxx 50 with targets at 6,600 and 6,800.
Monthly Fundamental Forecast for EuroStoxx 50
The conflict in the Middle East became a black swan event for European stock indices. In January and February, they outperformed the S&P 500 on expectations of faster economic growth in Europe. However, the surge in Brent crude prices completely changed the picture. Given Europe’s heavy dependence on energy imports, the region was seen as one of the most vulnerable to rising oil prices. Once geopolitical tensions faded into the background, however, the EuroStoxx 600 regained momentum.
The second quarter was the strongest for the broad European equity index since 2020. The index gained 10% during the quarter and extended its rally to a fourth consecutive week at the beginning of July, reaching a new record high. Following the end of the Middle East conflict, JPMorgan raised its year-end target for the EuroStoxx 600 to 670, above the consensus forecast, and lifted its EuroStoxx 50 target to 6,800, implying 7–9% upside from current levels. The bank expects earnings per share to grow by 18% in 2026 and 12% in 2027.
EuroStoxx 600 Performance and Forecasts
Source: Bloomberg
Deutsche Bank also expects stronger earnings growth for European companies. According to its estimates, second-quarter earnings per share will increase by 14%, exceeding the consensus forecast by two percentage points.
The STOXX Europe 600 is benefiting from capital rotating out of US equities and from favorable seasonal factors. July has historically been one of the strongest months for the EuroStoxx 600. Over the past ten years, the index has gained nearly 2% on average during the month, with only November delivering stronger average returns.
EuroStoxx 600 Seasonal Performance
Source: Bloomberg
According to Bank of America, US equity funds recorded outflows of $17.2 billion in the week ending July 1, marking the largest weekly outflow since March. Investors continue to seek alternatives to technology stocks, which appear overvalued, as the ability of these stocks to generate returns that justify massive investments in artificial intelligence remains uncertain.
Within the US market, investors have increasingly shifted toward small-cap stocks. The Russell 2000 posted its strongest first-half performance since 1991, outperforming the Nasdaq Composite by 9 percentage points— the largest gap since 2006. Its outperformance versus the S&P 500 reached 14 percentage points, the widest margin in 35 years. The ongoing market rotation is no longer confined to the United States.
Monetary policy is providing additional support for the EuroStoxx 600. Following the central bankers’ meeting in Sintra, markets scaled back expectations for further ECB and Fed rate hikes. Bloomberg expects borrowing costs in both the US and Europe to decline by the middle of next year, creating a favorable environment for risk assets.
Monthly Trading Plan for EuroStoxx 50
The strategy of buying European stock indices following the end of the Middle East conflict has proven successful. The upside targets for long positions in the EuroStoxx 50 remain unchanged at 6,600 and 6,800. Pullbacks should be used as opportunities to add to long positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of SX5E in real time mode
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Source: Original Article
