The STOXX Europe 600 has risen 8% since the start of the year, compared with 13% for the U.S. S&P 500, but rising global bond yields have raised doubts about European equities’ ability to extend their gains amid inflationary pressures and higher borrowing costs.
Bond yields weigh on valuations
Bloomberg calculations showed that the sensitivity of the STOXX Europe 600 to moves in the 10-year euro swap rate has nearly tripled this year compared with the previous five years, after excluding exceptional weekly moves.
Higher yields may push investors toward fixed-income instruments instead of equities, while also reducing the present value of companies’ future earnings. The impact depends on the reasons behind the rise: stronger earnings may offset the pressure if higher yields coincide with robust economic growth, whereas an increase driven by inflation raises borrowing costs for companies and consumers.
Growth and inflation send mixed signals
Eurostat data showed that the eurozone economy grew 0.6% in the second quarter compared with the previous quarter, while the preliminary composite purchasing managers’ index rose to 53.1 points in September from 52 points in August. A reading above 50 points indicates an expansion in economic activity.
By contrast, annual inflation in the eurozone reached 3.2% in August, up from 2.9% in July, according to Eurostat. Energy alone contributed 1.29 percentage points to the inflation rate, amid disruption in fuel markets caused by the Iran war.
The European Central Bank raised interest rates by 25 basis points this month, bringing the deposit rate to 2.5%. The bank expects average inflation to reach 3% in 2026 and 2.5% in 2027, stressing that its future decisions will be data-dependent and that it is not committing to a predetermined rate path.
Debt and energy pressures intensify
Public-finance conditions are adding further pressure to the market. The European Commission expects France’s deficit to remain at 5.1% of gross domestic product this year, while public debt is projected to rise from 115.6% of GDP in 2025 to 118.1% in 2026. It also expects interest payments to increase as new bonds are issued at higher yields.
Energy remains a key factor ahead of winter, after the International Energy Agency warned that oil supply shortages linked to unrest in the Middle East could persist. The European Commission, meanwhile, acknowledged that gas stocks are below historical levels while affirming that supplies are currently stable.
Banks benefit as consumer sectors face risks
Bank stocks may benefit from higher yields through increased net interest income, while companies tied to economic activity could also gain from improved growth. By contrast, the retail, automotive and luxury-goods sectors face pressure if rising energy prices persist and weaken household spending.
European equities’ ability to extend their gains depends on the path of corporate earnings. Sophie Huynh, a portfolio manager at BNP Paribas, said earnings resilience had so far helped equities withstand higher yields, but analysts beginning to cut their forecasts could change the market’s direction.
