European stock markets closed slightly higher on Monday, giving back most of their earlier gains after a provisional US-Iran agreement to restore passage through the Strait of Hormuz initially lifted sentiment.

The Stoxx Europe 600 index rose 0.2%, having earlier reached a new intraday record high. The index had been up as much as 1.3% earlier in the session before the advance faded near the close.

Cyclical sectors such as automobiles, construction, and travel & leisure led the gains, as falling oil prices eased concerns about inflation and growth. Defensive sectors lagged, with utilities and telecommunications under pressure; energy stocks fell 3% as Brent crude dropped to its lowest level since March.

Investors remained cautious, citing a continued lack of trust between the US and Iran and the history of previous agreements failing to materialize.

"The Iran deal is a positive for markets, but like tariff announcements, markets have become accustomed to taking such statements with a grain of salt," said Michael Field, Chief European Equity Strategist at Morningstar. "Given that equity markets are already near historic highs, I don't see them rising much further."

Since the conflict erupted, the Stoxx Europe 600 has underperformed the S&P 500 and the MSCI World Index. With nearly 60% of the European index's weight concentrated in cyclical sectors, European markets are particularly vulnerable to economic shocks from war. Meanwhile, the index has relatively few artificial intelligence (AI) related stocks, which have been driving gains in US and Asian markets.

Bhanu Baweja, Chief Strategist at UBS Group, believes that for the equity rally to be sustained, Europe needs to see capital expenditure expand beyond artificial intelligence.

In individual stock news, Schneider Electric SE shares rose 1.8% after announcing a strategic partnership with Hon Hai to jointly develop and scale next-generation AI data centers.