European Stock ETF Flows Just Made a Dramatic U-Turn. Here's What Drove the Rotation

Lower crude oil prices. The Iran ceasefire drove oil prices lower, materially improving the near-term outlook for energy-importing European economies. Lower energy costs removed a major headwind for corporate margins .

Geopolitical shock, then recovery. The Iran conflict in March 2026 caused sharp but temporary outflows: European open-end funds and ETFs shed €18.7 billion that month, and growth/tech equity strategies lost €23.3 billion in Q1 2026 as AI-exposed sectors were hit [11, 50]. Once a ceasefire was reached, investors returned quickly, with Q2 2026 setting a record for quarterly European ETF inflows at €113.6 billion—up 80% year-on-year .

How the Semiconductor Selloff Contributed

The semiconductor selloff is best described as a sector rotation within the broader European equity rally, not a cause of the reversal in overall flows.

Chip stocks saw a major correction: the Philadelphia Semiconductor Index (SOX) fell about 19% from its June 2026 peak, and more than $1 trillion was wiped off the most valuable chip stocks globally in late July [22, 23]. European semiconductor names moved sharply in divergent directions—Soitec surged on strong AI photonics demand, while STMicroelectronics and BE Semiconductor Industries fell on weaker near-term outlooks .

Deutsche Bank characterized the selloff as a "reset"—AI demand and earnings momentum remain "exceptionally strong," suggesting the correction is a healthy consolidation rather than the end of the cycle . Man Group noted the selloff "points to the AI trade shifting to the next phase," with markets starting to discriminate between winners and losers across the technology stack .

Crucially, the selloff did not derail overall European equity flows. Instead, it accelerated a rotation out of tech/growth and into cyclicals and defensives. Morningstar reported that growth-focused strategies shed €23.3 billion in Q1 2026 as AI enthusiasm cooled S. Bank of America warned that Europe's momentum rally was "running out of steam" and advised rotating away from AI-linked winners into defensive sectors . In short, the semiconductor correction redirected flows within European equities rather than reversing the broad inflow trend.

Key Forecasts for European Equities

The table above captures the range of views, but a reality check is warranted: in February 2026, 54% of respondents in a Reuters survey expected a pullback before European stocks could reach new highs .

Bulls vs. Bears: The Key Divide

The bulls (UBS, J.P. Morgan): UBS upgraded Eurozone equities and European banks to Attractive, arguing that lower oil prices allow markets to refocus on Europe's improving cyclical outlook and forecasting 25% cumulative earnings growth over 2026–2027 . J.P. Morgan remains constructive despite a "more complex geopolitical backdrop," with its base case seeing limited lasting economic damage from the Middle East conflict . HSBC led the bullish consensus with a 670 Stoxx 600 target early in 2026 S.

The cautious camp (BofA, Reuters poll consensus): BofA explicitly warned that the momentum trade is exhausted, noting that European high-momentum stocks had outperformed low-momentum shares by an annualised 40% so far in 2026—the strongest such rally in at least 20 years—and recommended shifting to defensives . The February 2026 Reuters poll consensus was for a mid-year pullback and only modest year-end gains . Many investors remain unconvinced that a durable rotation away from US AI-driven earnings growth has begun . Additionally, BlackRock's analysis noted that the reallocation to Europe has already seen reversals following risk rallies in US markets during the second half of 2025 .

Key Risks Going Forward

• Geopolitical escalation. The European Securities and Markets Authority (ESMA) rated risks of market and systemic stress as "high" entering 2026, with the Iran conflict the dominant near-term risk .
• Inflation and bond market spillover. Bond funds experienced the largest redemptions in March 2026 (€18.15 billion) on fears of escalating inflation from the Middle East crisis .
• AI capex disappointment. Deutsche Bank's CIO view notes that the semiconductor selloff was driven by investors "reassessing the durability of AI-related demand and infrastructure spending" . Any sign of hyperscaler capex cuts would hit European tech stocks hard.
• US outperformance risk. If US AI-driven earnings growth re-accelerates, the rotation into European equities could stall or reverse—as happened in H2 2025 . The fact that only 3% of European ETP assets are in active strategies, per State Street, also highlights the still-passive nature of this rotation .
• Valuation concern. European stocks are not cheap in historical terms—Goldman Sachs noted they are in the 71st percentile of P/E over the last 25 years, though they remain cheap versus most other assets S. Morningstar described markets as "fairly valued," offering less protection against future selloffs S.

The return of money to European equities represents a genuine structural shift driven by US concentration fatigue and improving European fundamentals. But the semiconductor correction and divergent analyst views serve as a reminder that this rally is not uniform. Whether the rotation has legs depends on oil prices remaining contained, AI infrastructure spending holding up, and the next geopolitical shock staying away from Europe's energy imports.