European markets are ending the week close to record levels, but momentum has moderated as investors balance encouraging economic data and strong corporate earnings against renewed geopolitical risks and higher oil prices.

One of the week's more constructive developments was the improvement in the euro area's external trade position. After recording a €7.8 billion goods trade deficit in May, the euro area returned to a €1.8 billion trade surplus in June. Exports rose 0.9% from the previous month, while imports declined 2.1%, helped by a smaller energy trade deficit.

The labour market also remains resilient. Euro-area employment increased by 0.1% in the second quarter, extending a long period of continued employment growth. The latest data suggest that the European economy is slowing rather than entering a sharp labour-market downturn, although Germany continues to lag some of its southern European peers.

This relatively stable economic backdrop has supported European equities. The STOXX 600 is heading for a modest weekly decline of around 0.2%, interrupting a four-week winning streak. Nevertheless, the index remains close to record highs, supported by a strong earnings season. Analysts expect second-quarter profits for STOXX 600 companies to increase by around 23%, with particularly strong contributions from energy and basic materials.

The main challenge is the external environment. Renewed tensions surrounding Iran have pushed Brent crude towards $88 per barrel, raising concerns that higher energy prices could reignite inflation and weigh on European consumers and industrial companies. At the same time, technology and defence stocks have remained relatively strong, highlighting the increasingly diversified nature of the European equity rally.

Investment perspective: European equities continue to benefit from attractive valuations relative to U.S. markets, improving earnings expectations and resilient employment. However, after the strong rally this year, investors should expect greater sensitivity to energy prices and geopolitical developments. For diversified portfolios, Europe continues to offer exposure to banks, industrials, healthcare, defence and selected technology companies, but the near-term environment argues for a selective rather than broad-based approach.

Source: Trading Economics, Eurostat and Reuters. Market data as of 14 August 2026.