European equities are mounting a comeback as easing inflation concerns and improving growth prospects revive the 'buy Europe' trade. The Stoxx Europe 600 Index has climbed roughly 1.5% this month while the S&P 500 slipped 1%, marking a significant shift in investor sentiment following the Iran conflict's earlier disruption.

The turnaround stems from an interim US-Iran agreement to reopen the Strait of Hormuz, pushing oil prices down nearly 30% in one month. This decline signals markets expect no major escalation, benefiting cyclical sectors like banks, automakers and luxury goods. Europe's relative lack of large AI companies also provides shelter as US tech stocks wobble on valuation concerns.

Raphael Thuin of Tikehau Capital argues this is the right moment to restore cyclicals to portfolios, citing diversification benefits away from tech risks. However, skepticism persists - a Bank of America survey shows 4% more fund managers expect European stocks to fall than rise in coming months.

Bond traders, recently repositioning for higher rates, will scrutinize Thursday's personal spending data to validate the market's hawkish turn. The divergence between European optimism and ongoing geopolitical uncertainty creates a complex backdrop for the second half of 2024.