Overview

Since the onset of the Middle East conflict, European equities have underperformed global markets by 7%, according to analysts at Goldman Sachs.

Key Drivers of Underperformance

Goldman identifies three primary factors: energy uncertainty, rising interest rates, and limited participation in the global AI‑led rally. The firm notes that European equities are negatively correlated with energy prices, bond yields, and the outperformance of technology stocks.

Energy Dynamics

The European Central Bank (ECB) acknowledges that the euro area is a net energy importer, making it sensitive to disruptions in global energy markets. Brent crude has softened to below $90 per barrel amid weaker global demand, while gas prices have risen in anticipation of peak summer demand in emerging markets and inventory rebuilding in developed markets ahead of winter. European economies are more sensitive to gas than oil; higher commodity prices are eroding margins and depressing earnings‑per‑share expectations for non‑commodity producers, with Germany and consumer‑discretionary sectors being the most negatively exposed.

Rate Environment

Goldman points to the ECB’s 25 basis‑point increase in the policy rate, combined with supply‑driven inflation and weakening growth momentum, prompting the market to price in additional near‑term tightening. This has pushed front‑end yields higher and made real rates more restrictive, creating rising margin risk and multiple compression for equities.

AI Participation Gap

Europe’s exposure to the AI‑driven rally is limited because technology accounts for only 10% of the European benchmark, which is dominated by financials, industrials, and healthcare. By contrast, global equity performance has been heavily AI‑driven: U.S. equities are up 8% YTD, with only 2% of that gain coming from non‑AI stocks, while Asia ex‑Japan is up 18% YTD but down 5% when AI‑heavy Korea and Taiwan are excluded.

Outlook

Although sentiment toward European equities remains negative, Goldman sees potential marginal improvement. The firm expects Brent to converge toward $90 per barrel in Q4 and its economists are dovish regarding further central‑bank tightening. Structural themes with durable earnings visibility—technology, banks, aerospace, defense, and renewables—are favored, whereas autos and chemicals are less attractive.