European Stocks Hit Record Highs Despite Hormuz Crisis: Inflation Risk Creeps Into Stoxx 600 Rally

A.P. Møller–Maersk offered the clearest example. The Danish shipping group reported second-quarter EBITDA of $3bn, well above the $2.12bn consensus forecast, on revenue of $15.8bn, up 20% from a year earlier. It raised its full-year underlying EBITDA guidance for the second time in 2026, now expecting $10.5bn-$12.5bn compared with its previous range of $8bn-$10bn.

Maersk shares rose 7-8% in early trading, while Hapag-Lloyd also gained.

The market is not simply betting on one strong shipping company. MSCI Europe companies posted a 17% year-on-year increase in second-quarter profits, the strongest growth since late 2022. Total earnings for the STOXX 600 are expected to rise 22%, or 11.5% excluding energy.

That breadth matters. Bayer, Deutsche Telekom, Adyen and defence company Renk were among other companies reporting strong results. European corporate earnings are therefore doing more than cushioning the geopolitical shock: they are challenging the assumption that the region must be the economic casualty of every global disruption.

The new value trade

The mechanics of the shipping boom illustrate the change.

With vessels forced to take longer routes around Africa and Arabia, freight rates, insurance costs and port congestion have all risen. For companies able to charge for that additional complexity, disruption has become a source of revenue.

It is a particularly European form of resilience. Rather than trying to finance another round of enormous technology investment, many European companies are monetising assets, networks and industrial positions they already possess.

The same logic is visible in technology. European companies adopting artificial intelligence are increasingly being rewarded for applying existing technology to their businesses rather than competing with US hyperscalers to build the infrastructure behind it. The European AI-adopter basket tracked by Bank of America is up 14% this year, compared with 4% for US hyperscalers.

That distinction is becoming increasingly important for investors.

The US technology trade has been built around extraordinary expectations for future growth and enormous capital expenditure. Europe's emerging technology trade is more closely tied to immediate productivity and earnings. It is less spectacular, but potentially easier to value.

The result is a broader reallocation towards companies with resilient cash flows, infrastructure exposure, defence demand and pricing power.

Foreign investors are following the same logic in European debt markets.

Why the bond market is voting for Europe

The most striking shift may be taking place outside equities.

German 30-year government bonds have been outperforming US Treasuries, while the spread between US and German 30-year yields has reached its widest point in a year. European government bond ETFs attracted more than €1.45bn in net inflows in July, more than twice the €655m directed towards dollar bond ETFs.

The euro, meanwhile, remains above $1.15.

This is not a declaration that Europe's economy has suddenly become stronger than America's. The growth forecasts still favour the US by a wide margin: eurozone real GDP is expected to expand 0.8% in 2026 and 1.2% in 2027, against 2.2% and 2.1% for the US.

The attraction is different.

Investors are increasingly treating the European Central Bank's policy path as more predictable than the combination of US fiscal pressures and uncertainty around the Federal Reserve. The ECB has raised rates once by 25 basis points this year, with two further increases anticipated by mid-2027 as it responds to energy-related inflation.

For investors, predictability has become an asset in its own right.

European debt is therefore benefiting from a relative shift in confidence rather than an absolute transformation in the continent's growth prospects. Japanese institutional investors are among those redirecting capital towards European sovereign debt, including French bonds, as the relative appeal of US Treasuries weakens.

That creates a feedback loop. More foreign demand supports European debt markets; stable financing conditions make European assets easier to hold; and the perception of relative stability attracts further capital.

But the trade has a weak point.

The profits are a symptom of the problem

Maersk's exceptional results are also evidence of how badly global trade has been disrupted.

The Strait of Hormuz carries roughly a quarter of global seaborne oil, major LNG flows and about a third of global fertiliser exports. Disruption has forced ships to reroute, increased war-risk insurance and created delays at ports. Overall exports across 12 key product categories from states dependent on the strait fell 54% year on year in April, according to the UN and International Trade Centre.

The sharpest declines are concentrated in products that Europe cannot easily replace.

LNG shipments through the route fell 95%, urea shipments 83% and ammonia 75%. Japan's oil imports fell 64%, while South Korea's declined 23%, forcing major energy importers to seek more expensive alternatives.

This is where the market's current optimism becomes harder to reconcile with the economic picture.

Higher shipping prices can increase the earnings of logistics companies. They also increase costs for manufacturers and consumers. A shipping line can profit from a longer voyage precisely because somebody else is paying more for that voyage.

The same applies to energy.

Brent was around $87.82 a barrel on August 13, down 1.4% during the session on concerns about global demand, but still nearly 26% above its July low. A daily decline in oil prices does little to resolve the underlying physical constraints if maritime traffic remains restricted.

For now, markets are treating those pressures as manageable. That assumption becomes much less comfortable if crude moves substantially higher.

Europe is not out of the stagflation trap

The early fear was that the Middle East war would push Europe towards stagflation: higher energy prices, weaker industrial output and pressure on household incomes. That has not happened in financial markets.

Yet the risk has not disappeared. It has moved further down the supply chain.

Energy-intensive manufacturers and agriculture are exposed to shortages of LNG and fertiliser inputs. Their vulnerability is not reflected in the headline profitability of shipping companies or technology adopters. If the disruption persists, higher transport and energy costs can eventually feed into production prices across the economy.

That would create a difficult policy problem for the ECB.

The central bank is already expected to raise rates twice more by mid-2027 to contain energy-driven inflation, despite the eurozone's weak growth outlook. A prolonged supply shock would leave policymakers balancing inflation against an economy that is expanding much more slowly than the US.

Markets can remain confident while that tension is still manageable. They become less forgiving once corporate margins begin to absorb the shock.

Political risk adds another variable. European debt markets are currently benefiting from confidence in policy predictability, but anticipated elections in France and Italy in 2027 will test whether that confidence extends beyond monetary policy into national fiscal politics.

For now, investors are willing to look through those risks.

They are also willing to look through the war.

That is why the European rally is more significant than a simple rebound in share prices. Capital is moving towards assets whose returns depend less on a single technology narrative and more on tangible earnings, infrastructure, defence, logistics and predictable policy. European equities are attracting their strongest foreign inflows in a decade, excluding 2021, even as the region remains one of the economies most exposed to the energy consequences of the conflict.

The contradiction is becoming harder to ignore.