Key Takeaways
- The Morningstar Europe Index ended the second quarter up more than 11%.
- Tech, financial, and industrial stocks led gains, while energy slumped from prior highs.
- Investor attention now turns to second-quarter earnings.
European stock markets have just closed out their strongest quarter since late 2020, with major indexes looking past geopolitical uncertainty and inflation concerns to push toward historic highs.
The Morningstar Europe Index ended the second quarter of 2026 up more than 10% in dollar terms, as exuberance for artificial intelligence boosted investor sentiment and stocks recovered from a sharp March selloff amid the Iran war. Europe’s rally nevertheless paled next to the tech-heavy Morningstar US Market Index, which gained around 16%, and the Morningstar Asia Index, which gained about 20%.
“An 11% return in a single quarter is an impressive return by any measure. Like in the US, much of these gains were driven by AI enthusiasm, with the European tech sector rising by almost 40% over the period. It wasn’t alone, though. Sectors like financials rose by almost 20%, and industrials were up a very respectable 14%,” says Michael Field, chief European markets strategist at Morningstar.
Tech Stocks Bolster Europe’s Rally
Europe’s semiconductor names were among the top-performing stocks for the quarter, with Germany’s Infineon Technologies IFX soaring over 100% and the Netherlands’ ASML ASML gaining 45% as the sector benefited from the AI capex boom. Other notable gains came from Nokia NOKIA, up 70%, and Siemens SIE, up 37%.
Energy stocks were the biggest laggards, falling 14% and shedding sharp March gains as investors bet on a de-escalation in Middle East hostilities and the reopening of the Strait of Hormuz. UK-listed BP BP and Norway’s Equinor EQNR both shed more than 20%. Other detractors included communication services, healthcare, and utilities, which ended the quarter broadly flat.
The Netherlands led gains on a regional basis, adding 34% thanks to index heavyweight ASML. Italy and Spain also gained more than 15%, while France and Germany both rose by a lesser 10% as dominant sectors such as software, consumer, and defense weighed.
As a result, market valuations now vary widely across Europe. Sweden, Spain, and Italy trade at or above Morningstar’s fair value estimates, the Netherlands trades marginally below, and France and Germany rank as the two cheapest sizable markets on the continent.
“Anyone thinking these sorts of returns are replicable every quarter may have to think again. Equities now trade at just a 4% discount to our fair value estimate. That doesn’t mean market enthusiasm can’t push markets higher, but it does mean that fundamentally, stocks have no real justification to do so,” Morningstar’s Field explains.
What Is the Q3 Stock Market Outlook?
Investor attention now turns to second-quarter earnings, kick-starting later this month, to gauge the outlook for the third quarter and beyond. Consensus expectations point to 12% year-over-year European earnings growth, according to Deutsche Bank, which notes that figure could push higher. “On the back of strong positive revisions into the earnings season, we forecast small but positive beats and see 14% earnings growth this quarter,” its analysts note.
Meanwhile, broader themes from the first half look set to dominate positioning in the future, as markets navigate the elusive US-Iran ceasefire, the latest iteration of the AI trade, and a new regime at the US Federal Reserve.
“These themes leave investors entering the second half facing a familiar set of questions,” says Neil Wilson, UK investor strategist at Saxo. “Can earnings continue growing quickly enough to justify premium valuations? Will inflation finally allow central banks greater policy flexibility? Could geopolitical tensions once again threaten energy markets? And, perhaps most importantly, will market leadership broaden beyond AI, or will a handful of technology companies continue to determine the direction of global equity markets?”
