Wall Street rises as materials and crypto stocks offset continued bond sell-off
Investing.com - European equities traded mostly lower Friday, marking their first weekly decline in over a month as trading desks digested transatlantic inflation data and escalating Persian Gulf energy risks.
The pan-European Stoxx Europe 600 Index fell 0.2%. The benchmark ended the week down approximately 0.4%, snapping a four-week winning streak - its longest stretch of consecutive weekly gains since April.
Regional performance diverged: Germany’s DAX outperformed with a 0.5% gain, while France’s CAC 40 and London’s FTSE 100 traded around 0.2% lower.
The weekly pause follows a summer rally that pushed European indexes to all-time peaks, driven by expanding corporate earnings and resilient regional activity. However, beneath the surface, Wall Street’s major strategy desks are clashing over whether the region’s equity multiples have expanded too far in the face of elevated real borrowing costs.
Software heavyweights led continental bourses on Friday, with shares of SAP SE, Nemetschek SE, Temenos AG, and Sage Group Plc surging between 3% and 8.5%. The sector caught a strong bid as duration-sensitive growth stocks reacted to cooling U.S. inflation metrics, which helped cap sovereign bond yields.
Wall Street desks clash on valuations: Barclays sees upside
Strategists at Barclays view the European macro setup as increasingly compelling, arguing that continental fundamentals are "heating up" as activity data defies stagflation fears.
"Even as US data have softened modestly, the EU macro backdrop remains surprisingly resilient, with economic surprises continuing to trend higher," Emmanuel Cau, head of European equity strategy at Barclays, wrote in a research pack.
Barclays noted that with global investors seeking to diversify artificial intelligence exposure beyond concentrated U.S. mega-cap technology, European equities offer less demanding positioning and valuation entry points alongside strong corporate buybacks.
BofA warns of yield pressure
Conversely, according to Bank of America, European equities have posted a remarkable 12% gain year-to-date and a 35% surge over the past two years. Strategists noted that while earnings per share expectations have climbed to record highs, the rally has compressed the European equity risk premium to a 25-year low, leaving valuations increasingly sensitive to discount rates.
"Rising real bond yields have been a headwind for equities," BofA strategists wrote in a note to clients, pointing out that the U.S. 10-year real yield - the benchmark discount rate for global risk assets - remains near a 20-year high at 2.4%.
However, BofA sees scope for that pressure to fade as U.S. payrolls cool and core inflation moderates, projecting nominal 10-year yields to decline toward 4.50%.
Despite the prospect of lower yields providing a tailwind for growth sectors like software, BofA maintains a negative fundamental outlook on European equities, forecasting a more than 10% downside for the STOXX 600 to 580 by early Q2 2027.
The bank warned that current risk premia fail to reflect risks surrounding energy supply shocks from the U.S.-Iran conflict, questions over the AI capital expenditure outlook, and U.S. labor market fragility.
Persian gulf standoff drives crude to weekly gain
Geopolitical friction provided the primary drag on equity markets throughout the week.
Crude oil benchmarks capped a volatile five-day stretch on track for a 4% weekly advance - snapping a two-week losing streak. Brent crude pushed back toward $89 a barrel after Washington threatened to ramp up maximum economic pressure on Tehran, raising the prospect of a naval blockade if commercial maritime access through the Strait of Hormuz is not restored.
The heightened military posture dashed hopes for an immediate peace agreement, keeping raw material input costs elevated for energy-intensive industrial sectors.
Against this geopolitical backdrop, global trading desks spent the week absorbing a dense transatlantic data sequence.
U.S. data calms rate-hike bets
In the U.S., adding a fresh layer of macro cooling on Friday afternoon, official Commerce Department data showed U.S. retail sales unexpectedly fell 0.6% month-on-month in July following an unrevised 0.2% gain in June, missing consensus expectations for a 0.1% advance.
The softening consumer footprint reinforces signals of an economic slowdown. July CPI landed on-target at 3.4% year-on-year, followed by a flat 0.0% month-on-month Producer Price Index reading.
Together with last week’s shock U.S. payroll contraction, the disinflationary data helped cool worries over aggressive monetary tightening. Money markets now price in roughly a 35% probability of a 25-basis-point Federal Reserve rate hike in September, down from nearly 67% last week.
Single-stock earnings updates generated sharp divergence across individual names. Renewable energy developer Energiekontor AG dropped as much as 15% after slashing its annual financial outlook, while cable manufacturer NKT A/S jumped as much 10% after upgrading its full-year earnings guidance.
