MW The moment of peak stagflation has passed. Here's how some strategists recommend to trade it.

By Jules Rimmer

Two European investment banks reverse their call and close their underweight in European equities

The outlook for luxury goods may turn more positive if the oil crisis has ended AFP PHOTO / SIMIN WANG

The memorandum of understanding to be signed this Friday between the U.S. and Iran has significantly reduced the risk of a stagflationary shock in Europe. Disinflation should support growth in Europe and investors should turn more positive on the region, adding exposure to luxury stocks in particular.

Although details on the peace deal remain murky at this stage, markets, as always, are discounting future trends and so both Deutsche Bank's and Barclays' European equity strategy teams have changed their recommended approach to stocks in the economic bloc this week.

With oil (BRN00) having halved from its March highs, rate expectations peaking and data steadying, Barclays strategist Emmanuel Cau is closing his underweight call on the European benchmark XX:SXXP and sets an end-of-year target of 670 for the STOXX 600 benchmark. That's about 5% above current market levels. The macro outlook for Europe in the second half of the year is suddenly clearer.

Europe has been a laggard compared to the US and other major markets in EM/Asia especially since the onset of US-Iran war

For the Barclays team, "the E.U. versus U.S. trade has largely been a call on oil and Tech since March."

Deutsche Bank's Maximilien Uleer had made exactly the same call, citing in his second-quarter outlook "the higher weight of Tech VGT in the S&P 500 SPX and a lower sensitivity to the effects of the Iran War." Uleer and his colleagues, Carolin Raab and Francesca Mazzali, closed their tactical switch on Monday, having banked 5% outperformance with the call.

The motivation for both these investment banks, among many others, was the huge advantage the U.S. enjoyed in terms of energy self-sufficiency while Europe had a major dependence on imported energy. The marked preference for the U.S. over Europe was also reinforced by the latter's meaningful outperformance in January and February, before hostilities in the Gulf kicked off.

Uleer emphasizes that earnings growth among European stocks are to "accelerate meaningfully" from 7% in the first quarter of 2026 to 13% in this quarter, and while the U.S. is still outstripping that, the gap is closing. For Barclays, the damage caused to consumer confidence and spending explained their previous underweight recommendation for consumer exposure but now they see this as dangerously consensual and close that call, reverting to marketweight for the sector.

While the US should continue to see stronger earnings growth (yoy) in Q2, theearnings growth gap of US vs EU is expected to shrink from 18pp in Q1 to 8pp in Q2.

However, Cau and his team recently highlighted the potential for a squeeze in luxury stocks - the most exposed to discretionary spending - as so many fund managers were underweight, any trend reversal would force them to increase exposure. Now, Barclays spots signs of earnings momentum inflecting upwards.

By cutting their recommended weighting in the more defensive healthcare sector, Barclays are funding their shift to overweight in luxury. The sector, it should be noted, is still in negative territory for the year. The European luxury sub-index contains names like Richemont (CH:CFR), LVMH (FR:MC), Hermes (FR:RMS), Ferrari (IT:RACE) and EssilorLuxxotica (FR:EL).

-Jules Rimmer

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June 17, 2026 05:21 ET (09:21 GMT)

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