The combination of a strong earnings season and falling oil prices is boosting the safe-haven appeal of European stocks, drawing investors back to the region as a hedge against the high volatility of global technology shares.

According to FactSet data, second-quarter earnings for European companies are on track to grow 22% year-over-year, marking the best performance since the market rebound from the 2022 pandemic crisis and successfully offsetting the earlier impact of high energy prices.

Why earnings season is a standout

Marina Zavolock, European equity strategist at Morgan Stanley, called it a "standout earnings season" for European stocks, noting that "profit performance across virtually all sectors has been very positive."

Data shows that European stock ETFs recorded their first monthly net inflows in July since the outbreak of the US-Iran conflict at the end of February. BlackRock reported that its European equity products attracted $44 billion in inflows during July, calling it "proof that capital is making counter-momentum allocations," moving out of volatile chip stocks.

Investors are rewarding strong results, pushing the Euro Stoxx 600 index to a series of record highs last week. Other major indices, including Germany's DAX, the UK's FTSE 100, France's CAC 40, and Spain's IBEX, also set new records simultaneously.

Zavolock pointed out that robust earnings have generated additional "diversification interest" in European stocks in recent weeks. Investors note that the global sell-off in semiconductor stocks in July has refocused attention on regions like Europe, where returns are less correlated with the volatility of tech and AI stocks.

Banking, tech, and energy lead the charge

Bank stocks emerged as standout winners in the European second-quarter reporting season, benefiting from rising interest rates driven by surging oil prices and increased trading revenue from volatile markets. BNP Paribas saw quarterly profit surge by a third, while UBS Group reported a 17% jump in profit to a record high, both driven by trading income. The Euro Stoxx Banks sub-index has significantly outperformed the broader market this year, rising over 21%, far exceeding the Euro Stoxx 600's 11.5% gain.

European tech stocks also made a significant contribution to index earnings growth, with chipmakers ASML and Infineon both raising their full-year revenue guidance. Energy stocks claimed a large share of Europe's second-quarter earnings growth, as oil and gas prices remained elevated during that period.

Hugh Gimber, global market strategist at J.P. Morgan Asset Management, stated: "If Europe can achieve double-digit earnings growth by 2026, it would be an extremely strong result for an economy where investors have seriously questioned the ability of corporate earnings to grow." He added that this "is supporting the rotation of capital into Europe."

From oil shocks to renewed interest

For much of the second quarter, European stocks lagged behind Wall Street, mainly due to the surge in oil and gas prices from the US-Iran conflict and the de facto closure of the Strait of Hormuz, which traders viewed as particularly detrimental to energy-importing Europe. However, signs of an end to the conflict between the US and Iran have pushed oil prices back below $90 per barrel, boosting Europe's economic outlook and allowing investors to re-enter the market.

Beata Manthey, head of European equity strategy at Citi, said the easing of the Middle East situation means Europe may have avoided the worst economic scenario under high energy prices, "which has already triggered significant capital" flowing into European stocks. At the same time, "international investors are starting to favour Europe again because it's an 'anti-AI trade'," she noted.

Despite high energy prices, the eurozone economy grew a better-than-expected 0.4% in the second quarter, which investors believe has also strengthened the case for investing in Europe.

Still playing catch-up, but gaining value

European corporate earnings still fall short of the exceptionally strong performance in the US, where the earnings season has also been impressive, with FactSet data showing year-over-year profit growth of 50%. Despite the recent rally in European stocks, the S&P 500 still holds a narrow lead over the Euro Stoxx 600 year-to-date.

However, Vera Fehling, chief investment officer for Western Europe at Deutsche Asset Management, pointed out, "For a long time, European earnings growth was essentially zero. Now, its value as a diversification tool is greater than ever."

Still, the volume of capital flowing into European stock markets remains below the record levels set in early 2026. Emmanuel Makonga, European equity strategist at Barclays, said international investor interest in Europe remains "selective," with bank stocks being the preferred choice for allocating to the region. He noted that capital inflows into European stocks in early July were more about "people pulling out of the US... rather than active interest in Europe." But as the earnings season progressed, "we have received confirmation that beyond pure diversification needs, there is fundamental support for this broader rally. People are actively seeking to re-engage."