Banking stocks also advanced, hitting their highest collective trading level since January 2008 on expectations of a stable, non-stagflationary macroeconomic backdrop. Conversely, the oil and gas sub-index dropped 3.1%, tracking the direct decline in raw commodity pricing.

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This historic market inflection demonstrates how rapidly a systemic decompression in energy-supply pipelines can reverse a structural investment discount across European asset classes.

The formal reopening of the Strait of Hormuz effectively removes a major macro tail risk that threatened to plunge the Eurozone into a deep, higher-for-longer inflationary spiral. Fund managers who had spent the spring buying eye-wateringly expensive U.S. technology hardware portfolios are recalculating their capital allocations, realizing that European consumer cyclicals, automotive platforms, and financial groups present far cheaper entry valuations now that the underlying energy shock is dissipating. The STOXX 600 has advanced 7.9% year-to-date, almost completely closing its long-standing performance gap with the US S&P 500.

However, the geopolitical breakthrough has simultaneously triggered an abrupt, multi-billion-euro reversal in the continent’s most crowded momentum trade: defense equities. The Stoxx Europe Targeted Defense index has plunged more than 15% from its January peak, erasing billions in market cap from heavyweights like BAE Systems, Rolls-Royce, and Rheinmetall.

For three years following the invasion of Ukraine, defense shares functioned as an effective cash machine, gaining over 40% annually and nearly doubling in 2025 on the back of aggressive state rearmament commitments. But the soaring government debt costs triggered by the Iran war have forced European capitals to scale back their fiscal deficits. The structural funding strain was laid bare by the high-profile resignation of the U.K. defense secretary, alongside Germany’s sudden withdrawal from the €100 billion Future Combat Air System joint fighter jet program with France.

Furthermore, recent earnings seasons have proven that converting massive military backlogs into actual bottom-line revenue is a much slower process than public equity markets had anticipated, with first-quarter revenues at Airbus and Thales widely missing consensus targets. Capital is also rotating within the defense complex itself, abandoning old-school tank and heavy armor manufacturers in favor of high-tech automated platforms.

With modern warfare rapidly shifting toward tactical drone deployment and military IT infrastructure, legacy industrial groups are facing a severe lack of positive earnings catalysts. As institutional players systematically unwind their positions in traditional hardware suppliers, the consensus view is that the easy money has already been made in the broader defense trade, shifting the equity premium entirely back to consumer and infrastructure cyclicals.

WHAT’S NEXT

The overriding market focus centers on Friday’s official diplomatic summit, where US and Iranian heads of state are expected to formally sign the finalized peace treaty.

Over the coming month, tracking the actual rate of physical oil transit through the Strait of Hormuz will be critical. Because regional infrastructure repairs will move slowly, energy costs are projected to descend gradually rather than crashing overnight, meaning that while the European Central Bank is insulated from implementing emergency rate hikes, traders are still pricing in a final 25 basis point monetary tightening before the end of the winter cycle to fully cement long-term price stability across the continent.