European stocks have fallen behind global markets by roughly 7% since the onset of the Middle East conflict, and analysts at Goldman Sachs attribute the performance gap to three broad forces: greater energy uncertainty, upward pressure on interest rates, and weak participation in the worldwide AI-driven tech rally.
Energy exposure and its transmission to corporate profits
Goldman Sachs notes that European equities display negative correlations with energy prices. The European Central Bank has highlighted that the Euro area is a net energy importer, which makes the region especially sensitive to disruptions in global energy markets. Although Brent crude has eased to below $90 per barrel amid weaker global demand, Goldman Sachs warns that geopolitical risks remain elevated.
Natural gas prices have also climbed as markets anticipate peak summer consumption in emerging economies and as developed-market players rebuild inventories ahead of winter. The bank underscores that European economies are more sensitive to gas than to oil, and argues that rising commodity costs are passing into corporate margins and damping earnings-per-share expectations for firms outside the commodity producer sector.
Within Europe, Goldman Sachs identifies Germany and the Consumer Discretionary sector as the most negatively exposed to higher gas prices, reflecting both industry structure and energy intensity in production and consumption.
Interest rates, inflation and valuation pressure
Valuations in European equity markets have faced downward pressure as persistent inflation and expectations of prolonged elevated interest rates weigh on investor outlooks. Goldman Sachs draws attention to the European Central Bank’s 25 basis-point increase in the policy rate and points to supply-driven inflation together with weakening growth momentum as factors prompting markets to price additional near-term tightening.
Those expectations are driving front-end yields higher and making real rates more restrictive, a dynamic that Goldman Sachs says culminates in rising margin risk and multiple compression for equities.
Limited participation in the AI-led rally
Goldman Sachs also highlights Europe’s narrow participation in the global equity gains driven by AI and technology. Technology accounts for only about 10% of the European benchmark, which is more heavily weighted to financials, industrials and healthcare. As a result, Europe has not benefited from the concentrated AI-related strength that has lifted other equity markets.
The bank contrasts Europe with global patterns of performance: U.S. equities are up 8% year-to-date, of which only 2 percentage points come from non-AI sources, while Asia ex-Japan has risen 18% year-to-date but would be down 5% excluding the AI-led gains from Korea and Taiwan.
Outlook and sector preferences
Despite a predominantly negative near-term sentiment toward European equities, Goldman Sachs suggests the outlook could improve modestly. The firm expects Brent crude to converge toward $90 per barrel in the fourth quarter, and its economics team is described as dovish regarding further central-bank tightening.
Given those expectations, Goldman Sachs expresses a preference for structural themes with more durable earnings visibility. Specifically, the firm favors exposure to Tech, Banks, Aerospace and Defense, and Renewables, while placing Autos and Chemicals among less-preferred sectors.
Together, Goldman Sachs’ analysis frames the region’s underperformance as a product of energy-driven cost pressures, rate-driven valuation adjustments, and a sector composition that has limited Europe’s share of the AI-led equity rally.