Since the start of the Middle East conflict, European stock indices have lagged global markets by 7%. Goldman Sachs analysts attribute this poor performance to a triple hit to the region’s economy: energy uncertainty, rising interest rates, and a critical shortage of AI‑related companies.
The eurozone is a net energy importer and highly vulnerable to geopolitical shocks. Although Brent has fallen below $90 per barrel due to weak global demand, gas prices are rising. Emerging markets are actively buying fuel at the peak of summer consumption, while developed countries are replenishing inventories ahead of winter. Goldman Sachs underscores that Europe is far more sensitive to gas costs. Expensive energy hits corporate margins and lowers expectations for earnings per share, with Germany’s economy and the consumer discretionary sector taking the biggest hit.
The second pressure factor is tight monetary policy. Due to a recent 25‑basis‑point ECB rate hike amid sticky supply‑side inflation and weak economic growth, investors have to price in further monetary tightening. As a result, short‑term yields have climbed, real interest rates have moved into restrictive territory, and equity valuation multiples have compressed.
Finally, Europe stays away from the global investment boom around artificial intelligence. The tech sector’s weight in the European benchmark stock index is only 10%, behind finance, industrials, and healthcare. Meanwhile, global growth is concentrated in AI and semiconductors. By comparison, the US market is up 8% year‑to‑date, but excluding AI companies the gain would be a mere 2%. Asian stock indices excluding Japan jumped 18%, but would be down 5% without the tech rallies in South Korea and Taiwan.
Despite current pessimism, Goldman Sachs analysts see scope for a gradual improvement in European markets. The bank expects Brent to settle at about $90 in Q4. Its economists anticipate a near‑term easing in the Federal Reserve’s policy. Analysts recommend investors shift focus to sectors with high earnings predictability — including technology, banks, defense/aerospace, and renewable energy — and to avoid automaker and chemical stocks.
