European stock markets may be due for a breather

European stock markets may be due for a breather after a strong run that has pushed a key technical measure to levels not seen in a decade, raising questions about whether the rally can keep going at its current pace.

The Stoxx Europe 600 index’s 14-day Relative Strength Index has climbed past 80, something that hasn’t happened much over the last 20 years. This measure tracks how fast prices are moving, and when it gets this high, it typically means stocks are overbought.

While this doesn’t spell doom for the long haul, market analysts who watch these patterns say it points to either a pause or a possible peak coming soon.

“Of course with this overbought level you always have the risk of a pullback,” Thomas Zlowodzki, who handles stock strategy at Oddo BHF, told Bloomberg. “It’s quite clear that European markets can’t continue climbing at that pace.”

Even so, trading activity suggests people are still eager to buy, Zlowodzki noted. He expects the Stoxx Europe 600 to reach as high as 650 points by the end of 2026, up from Monday’s close of 611. He pointed out that most of last year’s gains happened in the first two months, which explains why investors don’t want to sit on the sidelines now in case history repeats itself. “You could miss your yearly performance on that,” he explained.

European markets outpace US counterparts

The Stoxx Europe 600 has jumped 3.2% so far this year, coming off a 17% climb in 2025. It’s already ahead of the S&P 500, which is up just 1.9%. Since the idea of “US exceptionalism” started showing cracks last year, money managers have been moving their bets away from American holdings to other parts of the world.

The dollar took the biggest hit from this shift, while European and emerging-market stocks benefited. European stock prices, though still much cheaper than American ones, now sit well above their long-term average. Meanwhile, US stocks aren’t showing the same overbought warning signals.

Europe has attracted investors with interest rates already much lower than those in the US. The EU is also increasing infrastructure and defense spending, with Germany leading the way.

However, traders are betting on two Federal Reserve rate cuts this year, which would narrow the gap with European Central Bank policy. Plus, governments beyond Germany may struggle to boost spending because of budget limits in major economies like France or Italy.

Credit markets also show investors are taking on more risk. The Markit iTraxx Europe index, which tracks credit default swaps on the region’s investment-grade companies, is trading around 49 basis points, its lowest level in roughly four years, based on Bloomberg data.

The index measuring high-yield credit risk was quoted just below 240 basis points, also a four-year low. Borrowing costs are near record lows, with the spread on a Bloomberg investment-grade index at about 77 basis points.

Concerns over rally sustainability

Roland Kaloyan, who heads European stock strategy at Societe Generale, feels uneasy about how quickly economically sensitive cyclical stocks have risen in value. “Of course, there’s Germany’s stimulus plan, but we expect it will mostly give a boost to German stocks, rather than to the whole region,” he said.

The European economy isn’t growing fast enough to support expectations that earnings will increase by more than 10%, Kaloyan added. Hitting those numbers would need strong acceleration in the US and China.

“Some of the rise of European stocks can be explained by the fact that fund managers need to de-risk and diversify from tech and the US,” he said. “Also there’s a trend these past years of much of the yearly performance being achieved in the first quarter.”

Unlike booming US profits, earnings for European companies were flat last year. The main reason shares in the Stoxx 600 have risen is because valuations have inflated.

This mirrors sluggish economic performance lately. The moderate growth acceleration seen in 2025 is already expected to slow to 1.2% this year. That’s far below the US economy, which is projected to expand by 2.1% in 2026.

Gains in Europe have also had little connection to the artificial intelligence craze that has driven Wall Street’s record run. Apart from chip-making machine company ASML Holding, the biggest European stocks are mostly drug makers and luxury brands

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