European markets posted extraordinary gains for investors in 2025, but conflict in the Middle East is making it increasingly difficult to sustain a positive view on the asset class, according to managers from F&C and Rathbones.
In 2025, the Euro Stoxx index surged 32.2% according to data from FE fundinfo, as investors started to take advantage of value opportunities in the region and rotated out of the US.
The market entered 2026 similarly strongly, but most of the wind has been taken out of its sales following the conflict in Iran, with the index now up just 0.4%.
While extended conflict is not currently the market’s base case, further conflict may hit European risk assets hardest, according to some multi-asset managers.
See also: Iran war escalation prompts investor ‘panic’ as oil surges past $100 and FTSE plunges
Paul Niven, manager of the 150-year-old F&C Investment trust, said: “Europe rallied based on hope, and I think that hope will evaporate if this conflict continues.”
Will Mcintosh-Whye, multi-asset manager at Rathbones Asset Management, was similarly cautious: “Growth in the region will probably be good, but I just don’t think it’s likely to go gangbusters as some people think.”
Energy shocks
Part of the reason Europe was at risk was that it relies on the Middle East for energy.
Nearly 20% of the globe’s oil and natural gas supply flows through the currently contested Strait of Hormuz. The oil price has been volatile, briefly spiking to more than $116 per barrel before sliding to $90 recently.
Mcintosh-Whyte said because Europe imports most of its fuel (roughly 58% according to Eurostat in 2025), its costs are already high. Any sustained price shock from a lack of supply to the rest of the world would therefore be inflationary, according to the Rathbones manager.
See also: Covered: After a record year for European banks, what’s next?
“I’m staying with my case of being wary of this bounce back in Europe; if anything, I’m slightly more of the opinion that Europe is up against it,” he concluded.
F&C’s Niven agreed: “The longer this goes on, you’ll see that those countries with the greatest proximity to the supply and LNG impact, so that’s Europe and some Asian countries, will be most affected.”
Indeed, Lindsay James, investment strategist at Quilter, noted European gas prices have already spiked 60% since the start of March, based on data from Trading Economics.
“Shipping companies already seem to be pre-empting that potential threat by diverting round Africa as a result, so cost inflation will start to kick in on all imported goods to Europe from Asia in the days to come,” the Quilter analyst said.
Once bitten, twice shy
On top of this, historical experience leads people to be “sceptical that Europe will keep outperforming the US for an extended period of time,” Niven said.
“Plenty of times in the past, people have talked about Europe rallying and beating the US, and it’s not lasted.”
Barring a handful of short-lived rallies, the S&P 500 has outperformed the Euro Stoxx over the past three, five, 10, 15 and 20 years, according to data from FE fundinfo. Europe outperformed the US on a handful of occasions in the past decade, such as 2025, 2022 and 2017, but in all other years it trailed.
“I think in a lot of ways people are now once bitten and twice shy on Europe,” Niven said.
On top of this, he argued investors should be sceptical about some of Europe’s fundamentals.
In 2025, despite initially strong predictions for European earnings of around double digits, the earnings growth in the region was negative, and expectations had to be cut, Niven noted.
“Europe came an awful long way last year on no earnings and basically a lot of hope,” he said.
While the earnings picture is currently more positive, with plans for high infrastructure spending from Germany and solid expectations for defence companies, the market may be less forgiving if geopolitical conflict persists, he said.
“I’m just not sure people will be willing to hang onto their constructive views on European equities if the current disruption in the Middle East persists.”
Instead, Niven sees many better opportunities remaining in the US.
Covered: US equities at the crossroads
“There are numerous and fairly obvious reasons why the longer the conflict goes on, the more people will think of the US as a relatively safe haven, even with the point about valuations,” he said.
The meaningful outperformance of value relative to growth has led to decompression in many of the big tech stocks and AI losers, which might make them more appealing, according to the F&C manager.
“If the current situation persists, then it may well argue for some capital going back to some of those prior winners [the US], rather than recent winners,” he said.
See also: Gold hits $5,000 as geopolitics defines global markets
