European equities have finally broken out of their six-month trading range, with the Stoxx 600 climbing to fresh highs. Barclays analysts noted that the rally came later than in the U.S., Japan, and China, where AI-driven enthusiasm had already pushed markets to record levels.
Strategists led by Emmanuel Cau said Europe lagged due to a lack of AI and big-tech winners, fiscal and geopolitical concerns, and a strong euro. However, conditions have shifted in recent weeks. Stabilizing earnings revisions, easing tariff uncertainty, and more favorable currency dynamics are helping Europe catch up.
Barclays said the tactical risk-reward now looks compelling for European equities, adding that further gains in Q4 could become a pain trade for investors.
A broader recovery across sectors has been key. Exporters, China-linked companies, and short-cycle industries have started to rebound. Earlier in the year, a stronger euro weighed on exporters, but with the dollar stabilizing and Chinese data improving, demand-sensitive groups such as mining, semiconductors, and luxury goods are seeing renewed momentum.
Healthcare also appears set for recovery. The sector was previously hit by U.S. drug pricing reforms and tariff fears, but Barclays closed its underweight rating earlier this year, suggesting much of the downside risk is already priced in. The recent Pfizer deal with the U.S. administration could provide a framework for the industry’s future.
Equity flows also support the rally. Global markets attracted around $115 billion over the past three weeks, with Europe beginning to see modest inflows. Industrials led the charge, while most other sectors gained support, except Financials and Telecoms.
On the macro side, rising money supply, improving PMIs, and possible headwinds for U.S. sentiment from the government shutdown have created a constructive backdrop for Europe.
Still, risks remain. Barclays flagged political uncertainty in France as a key concern, but said lagging sectors are crucial for further upside. They noted that the recent outperformance of exporters, China proxies, and trade-sensitive names has been critical for the breakout in the Stoxx 600. With investor positioning still light, further gains could leave many traders exposed on the wrong side of the move.
