European Markets Record Bumper Q2 on Tech Rally

Key Takeaways

• The Morningstar Europe Index ended the second quarter up more than 10% in dollar terms.
• Tech, financials, and industrials led gains, while energy stocks slumped from earlier highs.
• Investor attention now turns to second-quarter earnings.

This week, European stock markets closed their strongest quarter since late 2020, with major indexes looking past geopolitical uncertainty and inflation concerns to push toward historic highs.

The Morningstar Europe Index ended the second quarter of 2026 up more than 10% in dollar terms, as exuberance for artificial intelligence boosted investor sentiment and stocks recovered from a sharp March selloff amid the Iran war. Europe’s rally nevertheless paled next to the tech-heavy Morningstar US Market Index, which gained around 16%, and the Morningstar Asia Index, which gained about 20%.

“Like in the US, much of these gains were driven by AI enthusiasm, with the European tech sector rising by almost 40% over the period,” says Michael Field, chief European markets strategist at Morningstar. “It wasn’t alone, though,” he adds. Financials were up around 18%, and industrials were up 12%, both in dollar terms.

Tech Bolsters Europe’s Rally

Europe’s semiconductor names were among the top-performing stocks for the quarter, with Germany’s Infineon Technologies soaring over 100% and the Netherlands’ ASML gaining 53% as the sector benefited from the AI capex boom. Other notable gains came from Nokia, up 70%, and Siemens, up 37%.

Energy stocks were the biggest laggards, falling 15% and shedding sharp March gains as investors bet on a de-escalation in Middle East hostilities and the reopening of the Strait of Hormuz. BP and Equinor both shed more than 20%. Other detractors included communication services, healthcare, and utilities, which ended the quarter broadly flat.

The Netherlands led gains on a regional basis, adding 33% thanks to index heavyweight ASML. Italy and Spain also gained around 15%, while France and Germany both rose by a lesser 9% as dominant sectors such as software, consumer, and defense weighed.

As a result, market valuations now vary widely across Europe. Sweden, Spain, and Italy trade at or above Morningstar’s fair value estimates, the Netherlands trades marginally below, and France and Germany rank as the cheapest sizable markets on the continent.

“Anyone thinking these sorts of returns are replicable every quarter may have to think again. Equities now trade at just a 4% discount to our fair value estimate. That doesn’t mean market enthusiasm can’t push markets higher, but it does mean that fundamentally stocks have no real justification to do so,” Morningstar’s Field says.

What Is the Outlook for Q3?

Investor attention now turns to second-quarter earnings, kick-starting later this month, to gauge the outlook for the third quarter and beyond. Consensus expectations point to 12% year-over-year European earnings growth, according to Deutsche Bank, which notes that figure could push higher. “On the back of strong positive revisions into the earnings season, we forecast small but positive beats and see 14% earnings growth this quarter,” its analysts note.

Meanwhile, broader themes from the first half look set to dominate positioning in the future, as markets navigate the elusive US-Iran ceasefire, the latest iteration of the AI trade, and a new Federal Reserve regime.

“These themes leave investors entering the second half facing a familiar set of questions,” says Neil Wilson, UK Investor Strategist at Saxo. “Can earnings continue growing quickly enough to justify premium valuations? Will inflation finally allow central banks greater policy flexibility? Could geopolitical tensions once again threaten energy markets? And, perhaps most importantly, will market leadership broaden beyond AI, or will a handful of technology companies continue to determine the direction of global equity markets?”