Bring out the stagflation investing playbook for European stocks.
“The conflict in the Middle East and rising geopolitical tensions have shifted the macro narrative away from a Goldilocks backdrop,” Goldman Sachs strategist Peter Oppenheimer warned in a new note on Tuesday. “While this is not our base case, the balance of risks has worsened and the probability of a stagflationary outcome has increased.”
“We do not think the market is fully pricing stagflation. Under stagflation, we would expect further equity downside and weak real returns.”
Oppenheimer said he recommends a defensive tilt for client portfolios. He expects telecom and consumer staple stocks to outperform amid a stagflationary shock, while consumer discretionary shares stand to lag.
Read More: What is stagflation, and how does it impact you?
“Historically, relative performance in stagflation has been driven by a limited set of recurring rotations: (1) Defensives vs. Cyclicals, (2) Commodities, (3) Value vs. Growth, (4) Pricing Power, and (5) Real Assets,” he wrote.
Similar to the US, major European stock markets have been swept up in sell-offs since the start of the Iran war. Key indexes like the Euro Stoxx 50 (^STOXX50E) and Stoxx 600 (^STOXX) dropped 2.5% on average during the first full trading session following the US escalation with Iran.
However, the downturn deepened as the conflict reached its one-month mark; by late March 2026, benchmark European equity indexes had fallen between 4% and 6% alongside their global peers.
Unlike the US, Europe’s high reliance on imported energy made the de facto closure of the Strait of Hormuz particularly impactful. Since the war, wholesale natural gas prices have spiked up 35%, and Brent crude surged roughly 50% to $110 per barrel.
The jump in oil prices has pushed inflation to multiyear highs — notably in Spain and Germany — raising concerns that the European Central Bank may have to delay planned interest rate cuts to combat rising prices, despite slowing economic growth.
Read more: How to protect your money during turmoil, stock market volatility
Meanwhile, as defense contractor stocks rise due to expectations of increased military spending, traditional heavyweights in the banking and industrial sectors (such as Deutsche Bank (DB), Siemens (SIE.DE), and Schneider Electric (SU.PA)) have seen significant declines due to rising sovereign yields and weakening momentum in manufacturing.
Deutsche Bank shares are down 20% in the past month alone.
Brian Sozzi is Yahoo Finance’s Executive Editor and a member of Yahoo Finance’s editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email [email protected].
