European stocks set for modest gains as Iran war dampens outlook, poll shows

By Sophie Kiderlin

LONDON - European shares will struggle to post further gains for the rest of this year, a Reuters poll found, weighed down by the economic hit from the Iran war and a relative lack of popular AI-related stocks.

The broad STOXX 600 index is expected to end the year at 645 points, up around 2.6% from its current level, according to the median forecast of 14 analysts polled by Reuters May 19-26. The euro zone blue chip index was predicted to rise a little over 2%.

Nearly all of the broad index's 6.1% gain for the year came in the first two months of 2026, before the U.S.-Israel war with Iran started, but renewed hopes of a deal to reopen the Strait of Hormuz - a key maritime shipping route through which about a fifth of the world's energy supply flows - and some exposure to the global tech rally have helped the bourse to edge back towards prewar highs.

Even if the waterway reopens soon, European companies are already bracing for a hit to their earnings. Meanwhile the European Central Bank is expected to raise interest rates in a bid to stop the surge in energy prices from spilling over into broader inflation.

Analysts and investors see European stocks as more vulnerable to those trends than those elsewhere.

"The major topics on a three-month horizon will be the Iran war, monetary policy and the earnings statements for Q2...With respect to all three, we think Europe has some disadvantages compared to other regions like North America or emerging markets," said Jörn Spillmann, head of investment strategy at Zürcher Kantonalbank.

"Assuming that the Iran war will not escalate further, we expect the European market to perform positively, but worse than the global benchmark."

It is not all doom and gloom and looking further ahead those polled expect the STOXX 600 to keep slowly grinding higher throughout 2027. Median expectations are at 670 points for mid-2027 and 694 points for end-2027, up around 6.6% and 10.4% from current levels.

"Our outlook for European equities isn't as rosy as it was at the beginning of the year... That said, many sectors of the economy are muddling through ok, and valuations are relatively supportive, with around 5% upside to European equities," said Michael Field, chief equity strategist, Morningstar.

AI OR ENERGY STOCKS?

Analysts also expect Europe to struggle compared to other markets due to its relative lack of exposure to the excitement around artificial intelligence that has boosted semiconductor stocks globally.

The S&P 500 has risen over 9% year to date, and MSCI's broadest index of Asia Pacific shares outside Japan has gained 22%.

"The overall impact (of AI) for the (European) stock market has mostly manifested in the form of foreign outflows," said Rajat Agarwal, an equity strategist at Societe Generale.

European tech stocks have risen nearly 20% so far this year, but they only make up around 10% of the STOXX 600.

Within Europe the relative performance of different markets also depends on the war in Iran and its impact on energy prices.

The median view saw Britain's FTSE 100 up 1.9% by year-end at 10,700 points.

"If higher energy prices persist then the UK can benefit from its higher exposure to that sector and Basic Materials (compared to) other equity regions in Europe," said Duncan Toms, multi-asset strategist at HSBC, who has the most bullish target for the British blue chip index.

The opposite is the case for Germany's industrial heavy DAX index.

The median forecast for Germany's DAX was for a 1.6% gain from current levels to 25,600 points by year-end.

(Other stories from the Reuters Q2 global stock markets poll package)

(Reporting by Sophie Kiderlin; additional reporting and additional polling by Samuel Indyk in London; Ozan Ergenay in Gdansk and Sarupya Ganguly and Mumal Rathore in Bengaluru; editing by Alun John and Sharon Singleton)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published May 27, 2026 at 3:46 AM.