European stock indexes, which slid amid market concerns over the Iran conflict, have since clawed back losses and now sit near their year-to-date highs. However, JPMorgan says a durable advance in the second half of the year depends on several specific developments converging.
Both the Euro Stoxx 50 (SX5E) and the STOXX Europe 600 (SXXP) have regained ground after the earlier drops. Still, JPMorgan warns that the near-term threat of escalation related to the Iran situation continues to weigh on Europe more than other regions. The firm noted that: "Relatively, the Iran conflict has likely hurt European prospects more than other regions," and observed that Eurozone indices have underperformed since the dispute began.
JPMorgan also pointed to a March recommendation to reallocate capital back into the so-called Magnificent 7, a stance that has been a headwind for European exposure. That positioning, combined with the geopolitical overlay, helps explain the region's lag relative to other markets.
Rates and yields
On monetary policy, the bank expects the European Central Bank to tighten policy this week, but it does not see this initiating a long, drawn-out hiking cycle. JPMorgan contrasted the current environment with 2022, when European real yields were at record lows and ECB policy rates were negative, prompting a forceful catch-up in rate rises. "This is not the case at present," the firm said, citing present yield levels as meaningfully different from that earlier backdrop.
JPMorgan suggested that if markets grow increasingly confident that rates and yields are unlikely to surge sharply, that could lend support to European equities going forward.
Positioning and activity
The bank flagged that the activity spread between the Eurozone and the U.S. is near unusually wide levels, calling the gap potentially "as extreme as it gets." At the same time, eurozone investor positioning is subdued, a situation JPMorgan compared with January of the prior year, which preceded a notable regional rally.
What JPMorgan says would need to happen
To see Europe mount a sustained breakout, JPMorgan identified a number of required conditions. Chief among them is a dovish turn by the U.S. Federal Reserve - a shift the bank described as currently "clearly very much out of consensus." Other prerequisites include materially lower oil prices by the second half of next year and early signs of recovery in China, which JPMorgan said would disproportionately help European markets because of trade linkages.
The bank added a set of additional potential tailwinds: further progress on German fiscal stimulus, any improvement in the Russia-Ukraine situation, and a more persistent rollover among the Magnificent 7 U.S. stocks. On the latter point JPMorgan said: "Having said that, as we move through 2H, we think Europe is set to break out to fresh highs, and believe that the region could even show spells of outperformance, especially if Mag-7 shows more sustained rollovers, and once Iran conflict risks subside."
Practical guidance for investors
At the market level, JPMorgan reiterated a tactical approach: use price dips caused by adverse geopolitical headlines as buying opportunities. The bank also recommended a focus on low-volatility equities, a positioning it had highlighted two weeks earlier. On defensive positioning it said: "We think that this group of stocks is likely to find support irrespective of where bond yields go from here, i.e., even if they move up."
That guidance suggests the bank views low-volatility names as relatively resilient across a range of yield outcomes, while broader European upside hinges on the confluence of the policy, commodity, geopolitical and growth dynamics the firm outlined.