European equities rose Friday after purchasing managers' index data beat expectations, reversing a run of losses that had pushed the STOXX 600 close to its worst consecutive losing streak in ten years. The pan-European benchmark recorded its fourth consecutive record close on Aug. 7, 2026.
The immediate catalyst was PMI readings showing business activity expanding faster than forecast. Readings above 50 signal expansion; European figures crossed that threshold in enough key economies to shift sentiment and draw buyers back into equities that had sold off through the week.
Q2 earnings provide the structural foundation. European firms are reporting earnings growth of 17 percent in the current cycle, the strongest rate since Q3 2022. Different data methodologies project Q2 growth estimates above 22 percent, but both metrics point to corporate Europe outperforming the valuations set at the start of the year. The FTSE 100, CAC 40, DAX 40, FTSE MIB and Euro Stoxx 50 all hit record highs on Aug. 7.
Economic momentum is running at its strongest pace since March 2023. That combination—accelerating growth and robust earnings—separates this rally from the sentiment-driven moves that characterized European equities in 2023 and early 2024, when valuations re-rated without earnings to support them.
The week's performance was on track to be the strongest since June before Friday's gains. European stocks had benefited from global tech-sector appetite and domestic earnings beats, with investor positioning at several large asset managers shifting from underweight to neutral over the past quarter.
The counterargument is direct: oil prices are rising, and European economies are net energy importers. Higher input costs compress manufacturer margins and squeeze household budgets simultaneously. The European Central Bank has less room to cut rates aggressively if energy-driven inflation re-accelerates, which puts a ceiling on multiple expansion that rate cuts would otherwise support.
Investor sentiment heading into U.S. jobs data was measured rather than euphoric. A weak labor report would reinforce expectations for a lower Federal Reserve rate path and ripple into European rate expectations through dollar-euro dynamics. A strong print would push dollar strength, tightening financial conditions for emerging-market dollar debt holders and creating headwinds for European exporters.
The rally's durability depends on whether Q2 earnings revisions hold through the reporting season. European equities have historically traded at a discount to U.S. peers on a forward price-to-earnings basis, a gap that has narrowed over six months as earnings upgrades closed it. If earnings projections above 22 percent materialize in final reported figures, the valuation case for European equities strengthens. If energy costs erode margins in Q3, the upgrade cycle stalls and the discount widens.
