European stocks have finally broken out of a six-month trading range, with the Stoxx 600 hitting fresh highs. Barclays notes that the rally has lagged behind similar surges in the U.S., Japan, and China, where AI-driven enthusiasm had already propelled markets to record levels.
“Lack of AI/Big tech winners along with fiscal/ geopolitical concerns and a strong euro meant that Europe wasn’t participating in the melt up until now,” strategists led by Emmanuel Cau said in a note.
The picture has shifted in recent weeks, with stabilizing earnings revisions, easing tariff uncertainty, and more supportive currency dynamics helping Europe catch up.
“Overall, we find the tactical risk-reward compelling for European equities. More catch-up for the region would likely be a pain trade in Q4,” they added.
The broadening of the rally is key. Sectors previously under pressure — including exporters, China-linked companies, and short-cycle plays — have started to rebound. Earlier in the year, a stronger euro weighed on exporters, but a stabilized dollar and improving Chinese data are boosting demand-sensitive groups such as mining, semiconductors, and luxury goods.
Healthcare, heavily sold off amid U.S. drug pricing reform fears and tariff concerns, is also poised for recovery. Barclays closed its underweight on the sector earlier this year, noting that much of the downside is already reflected in prices. The recent Pfizer (NYSE: PFE) agreement with the U.S. administration is cited as a potential framework for future sector developments.
Equity flows reinforce the trend: global markets have absorbed roughly $115 billion over the past three weeks, with Europe seeing modest participation, led by strong inflows into Industrials. Most other sectors gained support, with Financials and Telecoms as the only exceptions.
On the macro side, rising money supply, improving PMIs, and potential U.S. government shutdown risks provide a constructive backdrop for European equities.
Still, strategists caution that some risks remain, particularly around French politics, but they see further upside if lagging sectors continue to recover.
“The recent nascent outperformance of laggards such as EU exporters/China proxies/trade sensitive names has been crucial for the recent breakout in the SXXP,” the team said, noting that light positioning could leave many investors on the wrong side of the trade if gains persist.
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