STOXX 600 holds near record as oil rise tests Europe’s earnings rally

European stocks were little changed on Monday, holding close to record territory as investors weighed a strong earnings season against another rise in oil prices and an unsettled outlook for the Strait of Hormuz.

The STOXX Europe 600 traded around 660.1 in early dealings after closing at a record 660.25 on Friday and gaining 1.7% last week.

Technology shares led sector gains, while energy stocks advanced as Brent crude moved back towards $84 a barrel.

The restrained start suggested investors were reluctant to chase the index higher before a heavy run of economic data in Europe and the US.

Earnings are giving Europe a firmer floor

Europe’s latest record is being supported by a much stronger profit season than investors expected only a few months ago.

Second-quarter earnings for STOXX 600 companies are now projected to rise by about 21% from a year earlier, compared with estimates of roughly 12.5% in early May.

That improvement has helped offset concerns about high energy costs and weak domestic demand.

FactSet’s earlier read on the season also showed profits running comfortably ahead of expectations. Among companies that had reported by July 24, average earnings growth stood at 17.9%, versus 11.4% anticipated at the end of March.

The earnings beat rate was less striking, however, suggesting much of the upside was concentrated in a smaller group of companies.

That matters with the STOXX 600 already at a record. Strong earnings give investors a reason to stay invested, but the market has less room to absorb disappointing guidance after valuations have moved higher.

Monday’s sector moves reflected that balance. Technology stocks gained about 0.7%, while media shares fell roughly 0.7%.

Caledonia Mining advanced after reporting higher second-quarter profit as the European reporting season moved towards its closing stages.

Hormuz keeps an energy premium in European stocks

The bigger external risk remains the Strait of Hormuz, where diplomatic progress has yet to restore normal shipping.

Iran said at the weekend that an agreement with Oman defining new maritime lanes was in its final stages, but Tehran again tied a full reopening to concessions from the US.

An earlier framework discussed by the two countries would give Iran oversight of inbound traffic and Oman responsibility for outbound shipping, a structure Washington has opposed.

The uncertainty pushed Brent crude about 0.6% higher to around $84 a barrel on Monday and lifted Europe’s energy sector by roughly 0.5%.

For European equities, elevated crude cuts both ways. Oil and gas producers benefit from stronger prices, which has helped energy earnings lift the region’s overall profit growth.

But expensive fuel also raises costs for manufacturers, transport companies and consumers, while keeping inflation risks alive.

Earlier estimates showed energy companies contributing disproportionately to Europe’s second-quarter earnings growth.

Shipping conditions also remain far from normal.

The International Maritime Organization has documented at least 46 attacks on international shipping around Hormuz since the conflict began, meaning a diplomatic announcement alone may not be enough to remove the oil premium quickly.

Inflation and growth data could decide the next breakout

Investors now face a data calendar capable of challenging the record-setting rally.

Eurostat is due to publish flash second-quarter euro-area GDP and employment estimates on Thursday.

Its preliminary GDP reading showed the economy expanding 0.4% from the previous quarter, leaving employment as an important test of whether growth is broad enough to support company revenues.

The bigger global catalyst comes from the US. July consumer-price data are due on Wednesday, followed by producer prices on Thursday.

Those releases have become more important after Friday’s payroll report showed US employment falling by 23,000 in July, weakening the case for another near-term Federal Reserve rate increase.

Softer US rate expectations have supported European equities by easing pressure on global bond yields.

A hotter inflation report could reverse part of that move, particularly if oil continues to climb.

Europe therefore begins the week with record share prices, improving earnings and lower US rate expectations, but a geopolitical shock that is still feeding directly into energy costs.

That leaves the STOXX 600 well supported, though increasingly dependent on incoming data to justify its latest highs.