Europe’s Stoxx 600 Rebound: Cyclical Sectors Poised for Re-Rating in 2025

The Stoxx 600, a barometer of European equity markets, has emerged as a compelling asset class in 2025, defying long-standing skepticism about the region’s economic resilience. With the index up 2.85% year-to-date, analysts are increasingly bullish on its trajectory, forecasting a potential end-of-year level of 554 points—a 10% gain from current levels [2]. This optimism is underpinned by a confluence of macroeconomic improvements, policy tailwinds, and a re-rating of cyclical sectors that have historically lagged in European markets.

Macroeconomic Drivers and Earnings Momentum

The re-rating narrative begins with a stabilization in the Eurozone’s economic fundamentals. According to a report by Bloomberg, the HCOB Eurozone Manufacturing PMI rose to 49.5 in June 2025, signaling a retreat from contraction and a tentative return to growth [3]. Meanwhile, the services sector has rebounded, with business confidence hitting its highest level since February 2022 [3]. These developments have translated into corporate earnings momentum: first-quarter earnings for MSCI Europe constituents surged 5.3% year-over-year, far outpacing analyst expectations [1].

Strategists at JPMorgan and Citigroup have amplified this optimism, projecting the Stoxx 600 could surpass 580 points by year-end, driven by a “flight to value” in cyclical sectors [1]. This shift is not merely speculative—it reflects a recalibration of risk appetite as investors price in reduced trade uncertainties and a softening of inflationary pressures.

Cyclical Sectors: The New Sweet Spot

Cyclical sectors, long undervalued in European markets, are now at the forefront of this re-rating. Original equipment manufacturers (OEMs), transportation, and retailing are particularly well-positioned to benefit from Germany’s €50 billion infrastructure investment plan and the broader electrification transition [4]. For instance, OEMs supplying components for electric vehicles (EVs) are seeing demand surge as automakers accelerate production timelines. Similarly, transportation firms are capitalizing on improved trade flows, with tariff reductions easing cross-border logistics bottlenecks [5].

The energy sector, though historically volatile, is also showing signs of stabilization. As renewable energy adoption accelerates, companies involved in grid modernization and energy storage are attracting renewed interest. Meanwhile, financial services—another cyclical sector—has demonstrated resilience, with undervalued banks like BNP Paribas and BBVA recovering from earlier volatility [5].

Strategic Implications for Investors

The re-rating of cyclical sectors presents a dual opportunity for investors. First, it offers exposure to companies with earnings growth directly tied to macroeconomic cycles, which are now showing signs of normalization. Second, it aligns with structural trends such as electrification and infrastructure modernization, which are likely to sustain demand even beyond the near term.

However, risks remain. Geopolitical tensions and potential policy missteps could disrupt the fragile momentum. That said, the current valuation of cyclical stocks—many trading at multi-year lows—provides a margin of safety that mitigates downside risk.

Conclusion

The Stoxx 600’s rebound is not a fleeting rally but a structural re-rating of sectors poised to benefit from macroeconomic normalization and policy-driven growth. As European equities outperform their U.S. counterparts—bolstered by a 0.5% gain on Tuesday amid S&P 500 futures declines [1]—investors would be wise to overweight cyclical plays. The tides are rising, and those who act now may find themselves well-positioned for a sustained upcycle.

Source:
[1] JPMorgan and Citi See European Stocks Blowing Past the US [https://www.bloomberg.com/news/articles/2025-05-20/jpmorgan-citi-see-european-stocks-beating-us-by-most-in-decades]
[2] Equities in 2025: Embracing a Broader Landscape [https://am.gs.com/en-it/institutions/insights/article/2025/equities-in-2025-embracing-a-broader-landscape]
[3] Quarterly Market Review — 2Q2025 [https://www.wellington.com/en/insights/quarterly-market-review]
[4] Are the tides rising for European equities in 2025? [https://www.janushenderson.com/en-us/investor/article/are-the-tides-rising-for-european-equities/]
[5] As Global Markets Recover, Which European Stocks Have Risen [https://global.morningstar.com/en-gb/stocks/global-markets-recover-which-european-stocks-have-risen]