From "Forgotten Corners" to "New Safe Havens": European Stock Earnings Season Wows Everyone, with a 22% Profit Growth Reaching a Four-Year High

Strong earnings season and a drop in oil prices are collectively enhancing the defensive attractiveness of European stock markets. Meanwhile, investors are returning to European markets, viewing them as a hedged alternative against the volatility of global tech stocks. According to FactSet, European companies are expected to see a year-on-year earnings growth of 22% in the second quarter of this year, marking the best performance since the global market rebound from the COVID-19 crisis in 2022, successfully mitigating the adverse effects of previously high energy prices. Morgan Stanley European equity strategist Marina Zavolok noted that this is a "prominent earnings season for European stocks," pointing out that "the earnings performance across almost all sectors has been very positive." Data shows that European stock ETFs recorded their first monthly net inflow in July since the outbreak of the U.S.-Iran conflict at the end of February. BlackRock stated that its European equity products attracted $4.4 billion in inflows in July, indicating that "capital is reallocating," moving out of the highly volatile chip stocks. Investors are responding positively to strong performances, pushing the European Stoxx 600 index to consecutive record highs last week. Other major indices, such as Germany's DAX, the UK's FTSE 100, France's CAC 40, and Spain's IBEX, also set new records. Zavolok highlighted that strong earnings have brought additional "diversification interest" to European stocks in recent weeks. Investors observed that global semiconductor stocks faced severe sell-offs in July, prompting a renewed focus on regions like Europe, which have lower correlations to tech and AI stock volatility. Banking stocks emerged as notable winners in the European Q2 earnings reports, benefiting from soaring oil prices driving interest rates up, as well as increased trading revenues amid volatile market conditions. BNP Paribas saw its quarterly profits soar by a third, while UBS Group's profits surged 17% to a record high, both driven by trading income. The European Stoxx Bank sub-index has significantly outperformed the market this year, rising over 21%, far exceeding the Stoxx 600's 11.5% increase. European tech stocks also made an important contribution to index earnings growth, with chip manufacturers ASML and Infineon both raising their full-year revenue guidance. Energy stocks similarly accounted for a large share of European earnings growth in Q2, during a time when oil and gas prices were high. J.P. Morgan Asset Management global market strategist Hugh Gimber stated, "If Europe can achieve double-digit earnings growth by 2026, it would be an extremely strong achievement for an economy that has faced significant investor skepticism about its corporate earnings growth potential." He added that this is "supporting capital rotation into Europe." For most of Q2 this year, European stock markets lagged behind Wall Street, mainly due to the damaging effects of the U.S.-Iran conflict and the effective closure of the Strait of Hormuz, which led to soaring oil and gas prices that were particularly unfavorable for energy-importing Europe. However, signs of U.S.-Iran efforts to ease the conflict have brought oil prices back below $90 per barrel, boosting the European economic outlook and allowing investors to test the waters in the European market again. Citi's head of European equity strategy, Beata Manthey, noted that the easing situation in the Middle East likely means Europe has avoided the worst-case economic scenario under high energy prices, stating "this has triggered significant inflows" into European stocks. Additionally, "international investors are beginning to favor Europe again, as it represents a 'counter-AI trade,'" she remarked. Despite high energy prices, the Eurozone's economy grew unexpectedly by 0.4% in Q2, which investors believe also enhances their willingness to invest in Europe. European corporate earnings, however, still lag behind the unusually strong performance of the U.S. the U.S. earnings season has also shown promising results, with FactSet noting a year-on-year earnings growth of 50%. Despite the recent rebound in European stocks, the S&P 500 index is still slightly ahead of the Stoxx 600 index year-to-date. However, Vera Fehling, chief investment officer for Western Europe at Deutsche Asset Management, pointed out that "for a long time, Europe's earnings growth was basically zero. Now, its value as a diversification tool is far greater than before." Nonetheless, the amount of funds flowing into the European stock market remains below record levels set in early 2026. Barclays European equity strategist Emmanuel Makonga stated that international investor interest in Europe remains "selective," with banking stocks being a popular choice for European investments. He noted that the inflow of funds into European stocks since early July is more of "a withdrawal from the U.S. ... rather than an active interest in Europe." However, as the earnings season progresses, "we are getting confirmation that, aside from pure diversification needs, this round of expansion is also supported by fundamentals. People are actively seeking to re-engage."