The accumulated advantage over many years is fading, and the attractiveness of European stocks is weakening.

Attracting investors back to European stock markets took several years, and keeping them there is beginning to become a challenge. The impact of the Iran war on the Eurozone stock market is much greater than on the US stock market. Since the war broke out, the Euro Stoxx 50 blue-chip stock index in the Eurozone has fallen by more than 7%, while the S&P 500 index has fallen by less than 4%. Although the performance of European stock markets this year still outperforms that of the US, the trend is showing signs of reversal. At the same time, the valuation discount advantage that European stock markets previously enjoyed is rapidly disappearing, and the US stock market itself has undergone a significant valuation downgrade, narrowing the gap between the two. Since October of last year, the expected price-to-earnings ratio of the S&P 500 index has fallen by about 15%, eroded by concerns about the disruptive impact of artificial intelligence and excessive spending on this technology. Additionally, concerns about private credit have also taken a toll on the US stock market, especially in the software sector. In contrast, during the same period, similar indicators for the European Stoxx 600 index have remained stable. One of the problems faced by Europe relates to profit prospects. Previously, profit expectations continued to rise driven by expectations of fiscal expansion and low interest rate policies, but these driving factors have gradually diminished. Europe's economy and corporate profits are very sensitive to oil prices, and the era of loose monetary policy seems to have ended. The next move for the European Central Bank is likely to be a rate hike, possibly as early as this month. The market has already factored in expectations of nearly three rate hikes this year, and energy shocks have begun to feed into inflation data. A team led by Bloomberg Industry Research Strategist Laurent Douillet said, "The profit power of European companies is unlikely to withstand the inflationary shock triggered by Iran as it did during the energy shock of 2022." They pointed out, "Global nominal economic growth has slowed - from 12.5% in 2022 to 6.6% - reducing pent-up demand, softening labor markets, reduced fiscal support, all of which weaken companies' pricing power and make it difficult to defend profit margins, especially as operating profit margins are close to a record 12.5% after excluding the financial and energy industries." The team's model predicts that earnings per share for the Stoxx 600 index in 2026 will grow by about 5%, much lower than the 25.5% growth four years ago and the current market consensus of 10%. However, Bloomberg strategists emphasize that it is too early to assert a profit decline given that oil prices need to remain above $100 for several months in order to trigger an economic contraction. In recent months, profit momentum has shifted towards the United States, with the earnings revision index remaining positive, in sharp contrast to Europe where the number of downgrades exceeds upgrades. While the United States is energy independent and should be less affected by oil supply disruptions than Europe, it also faces other issues that may explain the recent valuation downturn, including high exposure to the technology and software industries, tight labor markets, and uncertainty about interest rate trends, all of which are making some investors cautious. Swisscanto portfolio manager Stefano Zoffoli said, "The US market is less affected by the Iran crisis, but labor market challenges - partly driven by artificial intelligence - and a struggling private credit industry are facing headwinds." He still believes that US stock valuations are too high. Now, major central banks may become key variables: if the escalation of the war drives up oil prices, US bond yields may rise further, weighing down global stock markets; but a surge in oil prices could also prompt expectations of a recession, which could signal rate cuts. In either scenario, the outlook for monetary policy seems to favor the US. Daniel Morris, Chief Market Strategist at BNP Paribas Asset Management in France, said, "If negotiations to end the conflict are successful, a rate cut could stimulate a market rebound. We believe that compared to the more passive response of the European Central Bank, the Federal Reserve is relatively patient with regard to the impact of rising oil prices on inflation, which will further support the US stock market." Looking at recent price trends, confidence in the European market remains low. The Stoxx 600 index has wiped out all the valuation expansion accumulated between October of last year and February of this year in just one month. The German DAX index has been hit hardest by profit-taking during the conflict, falling by over 8% since the war broke out.