Trump says Iran war "close to over" amid hopes for more negotiations
Investing.com - Goldman Sachs said stagflation risk has re-entered the debate for European markets as the conflict in the Middle East and rising geopolitical tensions have shifted the macro narrative away from a Goldilocks backdrop.
The firm’s commodities team raised energy price forecasts, with Brent now expected at $80 per barrel in Q4 2026 versus $60 pre-war and TTF gas at €40 per megawatt-hour in Q4 2026 versus €30 pre-war. Goldman Sachs economists downgraded growth and upgraded inflation forecasts, while central banks have turned more hawkish.
Stagflation has historically been a poor environment for equities, characterized by low real performance and elevated volatility, with the median real quarterly STOXX 600 return falling to around -1% compared with +3% in non-stagflation periods. The Vanguard FTSE Europe ETF (VGK), which tracks European equities, is down 4.5% year-to-date, though it has gained 15% over the past year. According to InvestingPro, the fund has maintained dividend payments for 22 consecutive years, offering investors a 1.9% yield—a defensive characteristic valued during uncertain periods. Stagflation exerts double pressure on equities by compressing fundamentals via margin pressure and compressing valuations via higher rates and a more uncertain earnings outlook.
Goldman Sachs maintains a defensive tilt in its allocation, with overweight positions in telecoms and consumer staples and underweight positions in consumer discretionary. The firm remains underweight cyclicals that face rising input costs and competition from China, notably autos and chemicals.
The firm continues to favor defense and fiscal infrastructure, which also captures exposure to renewable energy. Goldman Sachs said its HALO basket, focused on capital-intensive stocks, has shown relative resilience during the recent sell-off and continues to see banks as an attractive value opportunity in Europe.
In other recent news, Goldman Sachs has downgraded its growth forecast for the Euro area due to a prolonged conflict with Iran, which has disrupted oil flows through the Strait of Hormuz. The bank now anticipates a 4Q/4Q 2026 GDP growth of 0.7%, a reduction from the previous forecast of 1.4%. This adjustment comes as Brent crude prices remain at or above $100 per barrel, and Hormuz flows are at just 6% of normal levels. Meanwhile, the European Central Bank’s recent meeting accounts have highlighted growing concerns about inflation falling further below target in the near term. Despite these concerns, ECB President Christine Lagarde stated that the bank expects inflation to stabilize at its 2% medium-term target. Lagarde also noted that the ECB’s current monetary policy approach remains suitable amid ongoing economic uncertainty. These developments reflect ongoing challenges and adjustments in the Euro area’s economic landscape.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.