European stocks edged lower on Monday as investors assessed the fallout from Friday’s technology-led selloff on Wall Street, while a sharp decline in oil prices offered some relief amid renewed hopes for a diplomatic settlement to the Iran war.
The STOXX 600 fell 0.10%, although European technology shares gained 0.30%, suggesting some stabilization after the pressure on global technology stocks. MSCI’s main world stock index was broadly unchanged. US equity futures recovered, with Nasdaq futures rising 0.73% and S&P 500 futures gaining 0.42%, after the S&P 500 dropped 1.82% on Friday and the Nasdaq Composite lost 2.86%.
The modest European decline came at the start of a busy week for financial markets. Investors are assessing the latest policy decisions from the Federal Reserve and the European Central Bank, a packed corporate earnings calendar and the US midterm elections on Tuesday. The combination leaves markets exposed to changes in interest-rate expectations, corporate profit forecasts and the political outlook for the world’s largest economy.
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Oil prices provided one of the clearest sources of relief. Brent crude futures fell 4.5% to around $108 a barrel after Iranian negotiators left discussions with Qatari mediators and a draft proposal for ending the conflict began circulating. A follow-up meeting remained possible, raising hopes that diplomatic efforts could prevent further escalation. US President Donald Trump had recently threatened additional attacks against Iran.
The decline in crude prices matters particularly for Europe, where energy costs influence inflation, industrial production and household purchasing power. A sustained reduction could ease pressure on businesses and consumers, while giving central banks more room to manage inflation. However, oil remained elevated, and the possibility of renewed military action meant investors had little reason to assume that the geopolitical risk had disappeared.
European equities face challenges that differ from those confronting US markets, particularly concerns about weaker economic activity and the sustainability of the global AI investment boom.
Sebastian Raedler, head of European equity strategy at BofA, said further expected weakness in euro zone purchasing managers’ index data was weighing on the bank’s outlook for the STOXX 600. He also identified the risk of disappointment in AI capital expenditure as a major reason for caution, arguing that AI models could become commoditized and competitive advantages prove less durable than investors currently expect.
The concern extends beyond the technology companies building AI systems. Semiconductor manufacturers, data-center operators, cloud providers and companies supplying power and infrastructure have benefited from the investment cycle. However, the market is beginning to place greater emphasis on the revenue and cash flow generated by that spending.
Emmanuel Cau, head of European equity strategy at Barclays, said deteriorating cash flows alongside rising capital commitments meant the debate over whether AI returns could justify the scale of investment was unlikely to be resolved soon.
The financial commitment is substantial. Goldman Sachs analysts expect capital spending by major cloud and technology companies, commonly referred to as hyperscalers, to nearly double to $800 billion this year and increase further to $1.2 trillion in 2027. At the same time, the bank expects S&P 500 earnings per share growth to slow to 18% next year from almost 30% in 2026.
That divergence presents a challenge for equity valuations. Companies can continue reporting strong revenue growth while spending so heavily on infrastructure that less cash remains available for shareholders or other investments. If earnings growth slows as capital requirements rise, investors may become less willing to pay premium valuations for businesses whose returns remain uncertain.
Kristofer Barrett, head of global equities at Carmignac, said the next stage of the market would focus less on identifying companies exposed to AI and more on determining which businesses were already converting demand into cash, which were still financing the infrastructure build-out, and what valuations investors were paying for each.
Apple’s earnings will provide an important test of investor expectations. The company faces scrutiny over its outlook for the crucial holiday quarter, comments from its chief executive about AI and the revamped Siri, and rising memory-chip costs. Analysts expect higher component costs to drag quarterly profit growth to its weakest pace in six quarters.
The results could offer insight into how AI investment and rising hardware costs are affecting companies outside the infrastructure supply chain. Investors will also look for evidence that Apple can turn its AI development into a stronger product and services proposition rather than relying primarily on the broader technology investment cycle.
US Election and Dollar’s Safe-Haven Role
The US midterm elections on Tuesday are another major consideration for investors, especially because the outcome could influence corporate taxation, technology regulation and government spending.
Markets are weighing the possibility of a Democratic victory in the House of Representatives, while the Senate race remains too close to call. A Democratic sweep could put pressure on US equities as investors assess the prospect of higher corporate taxes and tighter regulation of the AI industry. However, the party is expected to fall short of the two-thirds majority required to override a presidential veto, limiting its ability to enact major legislation without broader political support.
The political uncertainty comes as investors are already questioning the resilience of US technology valuations and the extent to which global markets rely on a relatively narrow group of large companies to sustain earnings growth.
Foreign exchange markets were comparatively subdued. The euro rose 0.46% to $1.1199, while the dollar gained 0.16% against the yen to 157.90. Higher oil prices typically weigh on the euro and yen because both the euro zone and Japan rely heavily on imported energy. Monday’s decline in crude therefore offered some relief to those currencies.
However, the dollar’s traditional safe-haven status is also facing scrutiny. Investors are concerned that a technology-driven selloff originating in the United States could weaken the currency rather than strengthen it, particularly if foreign investors reduce exposure to US equities.
George Saravelos, global head of foreign exchange strategy at Deutsche Bank, said the United States’ reliance on foreign equity inflows was historically unprecedented. He added that evidence showed the relationship between the dollar and equities could turn positive when a market shock originates in the US itself.
That creates a potential vulnerability. During conventional global risk-off episodes, investors often buy dollars and US Treasury securities. But if the source of financial stress is concentrated in American equities, foreign investors could sell US shares and reduce dollar exposure at the same time. Such a shift could weaken the currency’s support during a market downturn.
Central bank decisions and economic data will add another layer to trading this week. Markets are pricing in interest-rate increases from the Reserve Bank of Australia, the Bank of England and Sweden’s Riksbank, while Norway’s central bank is expected to leave rates unchanged.
Investors will also assess the US ISM manufacturing survey for October, due later on Monday, and Friday’s nonfarm payrolls report. The employment figures will be needed for expectations surrounding Federal Reserve policy, as evidence of a stronger labor market could limit the case for rate cuts.