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

• Nearly all of the STOXX 600's 6.1% gain for 2026 came before the U.S.-Israel war with Iran started; the conflict threatens earnings as the ECB may raise rates to combat energy-driven inflation
• Europe's tech sector has risen 20% this year but represents only 10% of the STOXX 600, leaving the region with less exposure to the AI rally that has driven the S&P 500 up over 9%
• The UK's FTSE 100 is expected to outperform with a 1.9% gain to 10,700 points, benefiting from higher energy sector exposure, while Germany's industrial-heavy DAX faces headwinds with only 1.6% forecast gain

Market Summary: European Stocks Face Modest Outlook Amid Iran Conflict

Key Forecasts and Data

A Reuters poll of 14 analysts (May 19-26) projects Europe's STOXX 600 index to reach 645 points by year-end, representing a modest 2.6% gain from current levels. The euro zone blue chip index is expected to rise just over 2%. Looking further ahead, the STOXX 600 is forecast at 670 points by mid-2027 and 694 points by end-2027 (6.6% and 10.4% gains respectively).

Germany's DAX is projected to gain 1.6% to 25,600 points, while Britain's FTSE 100 is expected to rise 1.9% to 10,700 points by year-end.

Main Market Drivers

Iran War Impact: Nearly all of STOXX 600's 6.1% year-to-date gain occurred in the first two months of 2026, before the U.S.-Israel war with Iran began. The conflict threatens the Strait of Hormuz, through which approximately 20% of global energy supply flows. European companies are bracing for earnings impacts, and the ECB is expected to raise interest rates to combat energy-driven inflation.

Regional Disadvantages: Analysts view European markets as more vulnerable than North American or emerging markets due to three key factors: the Iran war, monetary policy tightening, and anticipated weak Q2 earnings.

Limited AI Exposure: Europe lacks significant exposure to the AI-driven rally boosting global markets. European tech stocks comprise only 10% of the STOXX 600, despite rising nearly 20% year-to-date. By comparison, the S&P 500 has gained over 9% this year.

Market Implications

Higher energy prices favor the UK's FTSE 100 due to greater energy sector exposure, while Germany's industrial-heavy DAX faces headwinds. Analysts expect European equities to underperform global benchmarks despite positive absolute returns.