European shares climbed on Friday, driven by a strong performance in the technology sector as SAP's impressive gains lifted the pan-European STOXX 600 index by 0.6% to 644.67. This marks the index's second consecutive week of growth, with Germany's DAX also benefiting from SAP's 10% surge following better-than-expected cloud backlog growth.
The broader technology index rose by 1.7%, recovering some losses from earlier in the week when updates from STMicroelectronics and BE Semiconductor failed to meet investor expectations. The technology sector has been volatile as investors weigh AI-driven growth against high valuations and substantial investments.
Despite the positive momentum in tech, oil and gas stocks struggled to leverage Brent crude prices above $100 a barrel, as a 6.4% decline in Neste impacted sentiment. The Finnish biofuel maker reported second-quarter profits slightly below forecasts, contributing to the sector's underperformance.
“The two big problems for the big tech companies are that capex is no longer being funded out of free cash flow alone and that cheaper open-source AI is seriously threatening business models.”
Jim Reid, Deutsche Bank Analyst
Volkswagen shares dipped approximately 1% after the company revised its revenue growth forecast downward, following a 9.5% drop in second-quarter profits. In contrast, Valmet soared 22% after exceeding expectations in its quarterly results and announcing a potential business separation.
The European Central Bank's stance on interest rates remains a focal point, with policymakers hinting at potential hikes due to persistent inflation risks. Market data suggests a 25-basis-point increase is anticipated, with a 70% chance of another hike by 2026.
“We've moved from pricing in a period of weak growth and higher inflation to potentially even recession. We're not quite there yet... but we could get to that point very quickly.”
Chris Beauchamp, Chief Market Analyst at IG
Background
The European stock market has been experiencing fluctuations as investors balance the potential for growth driven by artificial intelligence against the backdrop of high valuations and significant investments in the technology sector. The performance of the STOXX 600 and other indices is closely watched as it reflects broader economic trends and investor sentiment.
As markets navigate these dynamics, the U.S. administration's new tariffs on goods from 60 trading partners add another layer of complexity. Investors will continue to monitor these developments closely, particularly the implications for international trade and economic growth.
