Tech Leads as Stoxx 600 Nears High, CAC 40 Lags

Key Takeaway

• European stocks show uneven performance, with the Stoxx 600 index near its 52-week high but individual stocks averaging 17% below their highs.
• French political uncertainty and S&P's downgrade have pressured the CAC 40, making it the worst-performing major Western European benchmark this year.
• Tech and banking sectors drive gains in Europe, while construction, autos, and consumer products lag due to recent EU election outcomes.

Uneven Rally in European Stocks

European stocks are experiencing an uneven rally, driven primarily by the tech sector and interest rates. The Stoxx 600 index is just below its 52-week high, but individual stocks are trading on average 17% below their 52-week highs, indicating unequal performance across the board. The top five performance contributors have generated 37% of the Stoxx 600’s returns this year, compared to more than 60% for the S&P 500. This highlights a concentration in performance, particularly in the tech and banking sectors, which have outperformed other groups. UBS strategists' analysis of the latest PMIs in Europe shows that only a few sectors are benefiting from healthy demand trends.

Interest rates are also playing a significant role. With rates coming down in parts of the globe, a "great rotation" is anticipated, although it is expected to be a lengthy and choppy process. The European Central Bank's recent "hawkish cut" has added to the complexity of the situation.

French Political Uncertainty

French stocks are under additional pressure following President Emmanuel Macron's call for a legislative vote after a defeat in the European Parliament election. The CAC 40, France's benchmark index, is the worst-performing major Western European benchmark this year, largely due to a challenging environment for luxury stocks and a lack of tech presence. The index plunged as much as 2.4% in early trading, with all members down. Banks like Societe Generale and construction giant Vinci led the declines, as election uncertainty is likely to weigh on domestic sectors.

Concerns about public finances are also growing, especially after S&P Global Ratings downgraded France earlier this month. The economic and earnings picture remains supportive overall, but the higher political risk premium from uncertainty in France and the broader EU gives traders a reason to take money off the table. The CAC 40, with a 12-month forward P/E of approximately 13.7, trades below its 10-year average of around 14, indicating it may become even cheaper.

Sector Performance and Economic Data

The performance of various sectors in the European market has been uneven. Construction, autos, and consumer products are the biggest decliners in the Stoxx 600, influenced by the recent European Union elections where far-right and populist parties increased their share of the vote. For carmakers, there is a potential push to delay the ban on the sale of new combustion engine vehicles from 2035 and an increase in import taxes on Chinese electric vehicles.

Economic data points to a mixed picture. While some sectors are benefiting from healthy demand trends, others are lagging. The uneven sector performance is further highlighted by the fact that single stocks are trading on average 17% below their 52-week highs, despite the Stoxx 600 being just below its 52-week high.

Street Views

• UBS Strategists (Neutral on European sectors):

  "Economic data is also pointing to just a few sectors benefiting from healthy demand trends, as shown by a granular analysis of the latest PMIs in Europe."