Analysis-War-hit European markets are far from down and out

European markets have rebounded strongly since the start of the Iran war, defying expectations and outperforming many other regions. The STOXX 600 index, a key European stock gauge, is near new highs, driven by robust company earnings that have surpassed forecasts. The euro is also at a three-month peak, reflecting investor confidence in the region's economic outlook.

In contrast to March, when the U.S.-Iran war caused concern about potential energy shocks and inflation, European equities have seen a significant inflow of $2.44 billion in the week to August 12, the largest since before the conflict began. Their resilience stems from limited exposure to AI-driven volatility and strong central bank guidance, even as inflation pressures persist.

European banks are among the standout performers, benefiting from a more favorable economic environment. While European earnings growth is still lagging behind some global peers, such as the S&P 500, the region's diversified exposure to sectors like finance, industry, and healthcare provides valuable diversification benefits. Investors are increasingly recognizing the potential of European stocks, which have risen about 10% this year, outpacing the S&P 500's 13% gain.

The euro has also strengthened, reflecting a generally softer dollar and improved economic data. Despite these gains, European equities still trade at a discount to their U.S. counterparts, offering a compelling opportunity for international investors seeking broader diversification.