For a long time, the EuroStoxx 600 has underperformed the S&P 500 due to geopolitical factors. However, the end of the conflict in the Middle East has become a game-changer. Lower Brent prices are good for the eurozone economy. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Geopolitics is favoring the EuroStoxx 600.
- European stocks are undervalued.
- Profits could exceed 23%.
- Long positions on the EuroStoxx 50 can be considered with targets at 6,600 and 6,800.
Monthly Fundamental Outlook for EuroStoxx 50
The S&P 500 has rallied 20% from its wartime lows. However, concerns over stretched valuations in Big Tech, the market’s outsized gains between 2023 and 2026, and the prospect of further Fed rate hikes are making investors increasingly cautious about adding exposure to US equities. As a result, many are looking elsewhere for opportunities—and Europe is emerging as a compelling alternative.
Unlike the S&P 500, the EuroStoxx 600 has only recently returned to its pre-war levels. Since the beginning of summer, the European benchmark has outperformed its US counterpart by roughly 1.5 percentage points, reversing a three-month period of persistent underperformance. The key driver behind this shift has been the end of the conflict in the Middle East, which sent Brent crude prices down by approximately 30% from their March peak. That development is particularly favorable for Europe, a region that remains a net energy importer.
Ratio Between EuroStoxx 600 and S&P 500
Source: Bloomberg.
Pessimistic forecasts for the eurozone economy due to geopolitical factors are currently benefiting the EuroStoxx 600. Actual data regularly exceed forecasts, which is helping the European economic surprises index outperform its US counterpart. In the past, whenever this spread widened, European stocks outperformed US stocks.
EuroStoxx 600/S&P 500 Ratio and Economic Surprise Index
Source: Bloomberg.
Beyond falling oil prices and signs of improvement in the eurozone economy, several other factors support the case for a continued rally in the EuroStoxx 600. From a fundamental standpoint, European equities remain attractively valued. The index trades at a forward price-to-earnings ratio of around 15, roughly 25% below the S&P 500’s. Historically, the EuroStoxx 600’s underperformance relative to the broad US market was partly attributable to its lower exposure to technology stocks. Today, however, that same characteristic is proving to be an advantage.
Investors are increasingly concerned that the tech rally has become overstretched. Capital is beginning to rotate toward smaller companies, as evidenced by the Russell 2000’s recent outperformance relative to the Nasdaq Composite. Against this backdrop, European equities offer an attractive opportunity for diversification and hedging. Moreover, after reporting approximately 7% earnings growth in the first quarter, European companies are expected to deliver earnings increases of 13% in the second quarter, 16% in the third quarter, and 23% in the fourth quarter.
EuroStoxx 600’s Seasonality
Source: Bloomberg.
If we add to this the fact that July is traditionally a strong month for the EuroStoxx 600 following a typically weak June, along with the reduced likelihood of an ECB rate hike due to falling oil prices, the bullish outlook for European equities becomes even more apparent.
Monthly Trading Plan for EuroStoxx 50
Any pullback in the EuroStoxx 50 blue-chip index may present an attractive buying opportunity, with targets at 6,600 and 6,800.
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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