European stocks and bonds draw strongest inflows in a decade

European markets are defying expectations in 2026, drawing a wave of capital from global investors seeking alternatives to the United States as geopolitical uncertainty reshapes portfolio allocations.

Record Highs Across European Equities

The Stoxx Europe 600 Index has rallied about 12 per cent this year, with benchmarks in Germany, Italy, and France scaling record highs. The pan-European index hovered near record levels on Tuesday, trading at around 660 points. European semiconductor firms such as ASML Holding ↘ 0.19% and Infineon Technologies have jumped more than 60 per cent in 2026, while the technology sector is up about 24 per cent year to date.businesstimes+2

The rally is underpinned by the strongest earnings season in nearly four years. MSCI Europe ↗ 1.24% constituents reported a 17 per cent surge in second-quarter profits, the largest jump since late 2022, according to data compiled by Bloomberg Intelligence. "People are really attracted to the earnings resilience," said Helen Jewell, international chief investment officer for fundamental equities at BlackRock ↘ 0.54%.businesstimes

European equities have attracted the strongest inflows in a decade, excluding 2021, driven almost entirely by foreign investors, according to Goldman Sachs The Goldman Sachs Group, Inc. ↘ 1.38%.businesstimes

Bonds and the Euro Gain Ground

German government bonds are outperforming US Treasuries, with the gap between 30-year Treasury and German yields hitting its widest level in a year last week. Euro government bond ETFs saw net inflows of over 1.45 billion euros in July, more than double the 655 million euros that flowed into dollar government bond ETFs.businesstimes

The euro stands near a two-month high, trading above $1.15, with MUFG Mitsubishi UFJ Financial Group, Inc. ↘ 1.17% forecasting it could rise to $1.20 by mid-2027. Meanwhile, emerging-market corporate bonds have also outperformed US peers, with the Bloomberg EM USD Aggregate Corporate Index seeing yields fall 19 basis points in August, driven partly by energy companies benefiting from the Strait of Hormuz closure.bloomberg+1

Risks Remain on the Horizon

Not all investors are convinced the rally is durable. Oil prices are nearly 26 per cent above a July low, and a deal to fully reopen the Strait of Hormuz remains elusive. Rising energy costs and the potential for renewed inflation could test the region's appeal later this year.businesstimes

"As we think the momentum unwind is largely done, from a relative perspective a renewed pick-up in semis makes it hard to see European outperformance as sustainable," said Duncan Toms, a multi-asset strategist at HSBC ↘ 1.32%.businesstimes