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Investors have broadly made up their minds which part of the world is ripe for punishment as a result of the war in Iran. Spoiler alert: It’s not the US.
“Punishment” is not quite the right word here. Stock markets do not exist to measure the relative merits and demerits of their home country’s government and policies, as a rule. They are simply a policy-agnostic way of reflecting the value and prospects of companies that are listed there.
Nonetheless, every big event — and the war in Iran is certainly one of them — has relative winners and losers in financial markets. In this case, the loser is very clearly Europe.
For now, most of its big national stock markets are still firmly up on the year so far, which is more than you can say for the US benchmark, the S&P 500, which is just creeping back into positive territory. The regional Euro Stoxx 600 index is still 3.8 per cent higher than it was at the start of 2026. But it is brave to assume this outperformance can continue.
At the start of the year, big fund managers were feeling very upbeat about stocks on the continent. Markets had put in a breakout performance in 2025, investors were keen to hold on to high-performing US assets but also to seek out opportunities elsewhere, and the long-awaited German government spending spree was about to really kick into gear. European investment money was increasingly staying at home and even US asset managers told me, with a good degree of surprise, that some American investors, retail and institutional, were keen to put money to work in Europe for the first time.
The war in Iran, however, has blown all of that out of the water. As asset managers figure out how to reconfigure portfolios to deal with the new economic reality that has taken hold since the conflict started, many are coming to the conclusion they have to put this romance with Europe on hold.
“We’ve seen a lot of momentum in flows moving to Europe,” said Olaolu Aganga at Citi Wealth. But the war in Iran and resulting escalation in energy prices demand a defensive rethink. “We look at earnings and look for companies that are truly delivering.” They are just not in Europe, at least not on the same scale. As a result, Aganga has been trimming European exposure and rotating instead to, you guessed it, large-cap US stocks.
This is a very common refrain. Also this week, Jim Caron, chief investment officer for the portfolio solutions group at Morgan Stanley Investment Management, said he expected the ugly market scenes of March, particularly the rapid ascent in energy prices, to prove to be a “detour” for the still healthy US economy and market.
By contrast, he said, the consensus view that Europe would streak ahead this year has been seriously wounded. “We’re thinking about making a move towards reducing our European overweight to being maybe underweight,” he said. “We’re taking down our European positions, going underweight in favour of the US.” It is a very similar story from UBS Wealth Management. The widespread hope that this year really would prove to be Europe’s moment is fading away.
Already, one of the key factors that pushed European markets so much higher last year was valuation multiple expansion — investors were willing to pay a higher price for companies and their earnings. This has never put people off buying US stocks, where valuations relative to earnings are much higher. But there appears to be little juice left to push European markets higher without an uptick in earnings expectations, which is just not happening. Analysts still think the US will churn out much higher earnings than European companies in the coming months.
In addition, yes, the US will have to swallow the same global energy costs as the rest of the world, but at least it exports the stuff, unlike Europe, the world’s biggest developed-market energy importer.
“Valuations and earnings estimates do not leave a lot of cushion in Europe,” said Ajay Rajadhyaksha at Barclays in a note this week. “This is not a crisis, of course. But it is the cleanest example of a major economy where a ceasefire will deliver relief — but also the bill that comes with the last six weeks.”
The US will not come out of this crisis unscathed. Already, the dollar has failed to perform its usual function as a haven for investors on anything like the scale we are accustomed to from previous stress periods. Military adventurism and flip-flop policymaking at the highest levels of the US government are not what conservative investors want from a super-safe market retreat.
But those same conservative investors feel the need to hunker down in reliable stocks with low sensitivity to energy prices in the wake of March’s reset. They are flipping to a more defensive stance in an unexpectedly volatile market environment, and all roads lead back to megacap stocks in the US.
No doubt, Trump will see this as a validation of his strategic genius. For the short term at least, it will help to bolster global investor sentiment towards the US that has been wobbling of late, on the margins. It is a bitter pill for Europe, but life isn’t fair.
