Morgan Stanley Downgrades European Energy Sector
Morgan Stanley downgraded European energy stocks from “overweight” to “equal-weight” on Friday. The bank cited the partial reopening of the Strait of Hormuz and a weaker long-term earnings outlook for the sector.
The reopening forms part of a memorandum of understanding between the United States and Iran. Morgan Stanley believes the agreement could limit further oil price gains and reduce the relative performance potential of European energy equities.
Energy Falls in Morgan Stanley’s Sector Ranking
Following the downgrade, energy dropped from fourth to ninth place in Morgan Stanley’s European sector model.
The change came after the bank doubled the importance of its Strait of Hormuz reopening sensitivity indicator. Before the agreement was announced, this factor carried an 8% weighting within the model.
According to Morgan Stanley, the adjustment reflects how the deal could affect oil prices and the performance of energy stocks compared with the wider European market.
Historical Trends Point to Energy Underperformance
Morgan Stanley examined several major periods of geopolitical tension, including the 1973 oil embargo, the Iranian Revolution, the Gulf War, the Iraq War and the Russia-Ukraine conflict.
Its analysis found that energy stocks often begin to underperform broader equity indexes after oil prices reach a peak driven by geopolitical risks.
The current cycle appears to be following a similar pattern. The relative performance of the MSCI Europe energy sector has already started to weaken after oil prices reached their recent high.
Brent Oil Forecasts Create Downside Risk
Current analyst forecasts for European energy companies assume an average Brent crude oil price of $88.50 per barrel in 2026. This suggests an average price of approximately $83 per barrel for the remainder of the year.
However, dated Brent was trading at around $77 per barrel at the time of the report.
Morgan Stanley’s oil strategists expect Brent crude to remain fundamentally anchored near $80 per barrel from the fourth quarter through 2027. This outlook supports the bank’s decision to adopt an equal-weight position on European energy stocks.
Energy Earnings Revisions Turn Negative
Recent earnings revision data also strengthened Morgan Stanley’s cautious position.
Four-week earnings revision breadth for the European energy sector had already turned negative compared with the broader European market. This may signal further weakness in the more widely followed three-month earnings revision measure.
The bank also noted that projected MSCI Europe earnings-per-share growth for 2026 had recently increased from 11.2% to 16.7%.
However, much of that improvement came from the energy sector. This has created a demanding comparison base and increased the risk of future downward revisions. Morgan Stanley’s own forecast for overall European earnings growth remains at 11.2%.
Six Energy Stocks Removed from Top Screen
Morgan Stanley removed six energy companies from its top 50 combined European stock screen, which plays an important role in its sector model.
The removed companies were TotalEnergies, Aker BP, Repsol, OMV, Tenaris and Neste.
They were replaced by three banking stocks, two utilities and one copper company, highlighting Morgan Stanley’s shift away from the European energy sector.
