Summary: Citi strategists argue that Europe's equity rally - which has taken the STOXX 600 to record levels - conceals uneven performance across sectors and countries. The bank sees potential for a second phase of the rebound, featuring greater rotation and market broadening, as investor positioning shifts and several fundamental headwinds ease.
The recent relief rally, prompted by the interim peace agreement between the U.S. and Iran, helped extend a multi-week rebound and lifted the STOXX 600 to all-time highs. Citi interprets that move as indicating that a sizeable portion of the geopolitical risk premium has already been removed from prices.
Still, the strategists caution that index-level strength can be misleading - strong headline performance has masked a patchwork recovery beneath the surface. A broad set of sectors and many individual stocks remain trading below levels seen before the conflict began, Citi said.
That underlying dispersion, Citi argues, creates room for what it calls a second phase of the recovery - one defined by greater rotation among sectors and broader market participation. The bank sees this as achievable in the near term as investor positioning adjusts and as some of the fundamental headwinds that have weighed on parts of the market start to abate.
Citi expects artificial intelligence to continue to be the dominant structural driver for global markets, supported by ongoing fundamental strength and market momentum. The bank points to marked performance dispersion across global equity markets since the initial ceasefire announcement in April. Technology-heavy and AI-exposed regions, including South Korea and the United States, have outperformed, while markets such as Australia and Hong Kong have lagged.
Within Europe, Citi notes that parts of the consumer sector, segments of industrials and certain defensive areas still trade below pre-conflict levels. At the national level, equity markets in Germany, the U.K., Sweden and France are also below their pre-war benchmarks, the strategists said.
To pinpoint where opportunities may be most attractive, Citi screened European sectors and countries using a composite ranking that combined four signals: the de-rating in 12-month forward price-to-earnings multiples since the U.S.-Iran conflict began, one-month earnings momentum, relative performance since the onset of the conflict, and long/short positioning crowding derived from Citi's quantitative indicators.
From that composite, healthcare equipment, autos and personal care emerged as the highest-ranked sectors, while consumer services and semiconductors ranked poorly. At the country level, Sweden, the U.K. and Germany scored as the most attractive markets, while Italy, the Netherlands and Spain ranked at the bottom of the list.
On a tactical basis, Citi said it favors Germany and Sweden and prefers consumer-related sectors such as autos, while maintaining technology as a primary overweight in its broader sector stance.
Key points:
- STOXX 600 reached all-time highs after a relief rally tied to the interim U.S.-Iran agreement, but index gains hide uneven recovery across sectors and countries.
- Citi's composite screening ranks healthcare equipment, autos and personal care highest among European sectors; consumer services and semiconductors lag.
- Sweden, the U.K. and Germany emerge as the most attractive country exposures in Citi's screen; Italy, the Netherlands and Spain rank lowest.
Risks and uncertainties:
- Persisting sector and country dispersion - parts of the consumer, industrials and defensive sectors remain below pre-conflict levels, which could limit uniform market gains.
- Shifts in investor positioning - the timing and extent of rotation into lagging sectors and markets will depend on how quickly positioning changes and whether fundamental headwinds truly ease.
- Regional performance divergence - continued outperformance by technology-heavy, AI-exposed markets versus laggards could sustain uneven returns across global and European indices.
Conclusion: Citi believes the recent highs in European indexes do not preclude further advance. Instead, the bank highlights a latent opportunity for wider market participation and sector rotation as positioning adjusts and selected fundamental pressures diminish, with technology remaining a central structural theme.