Investors have rapidly reassessed regional risk after the Iran war sparked a surge in energy prices. While the Euro Stoxx 600 still sits 3.8% above its start‑of‑2026 level, fund managers are trimming exposure, favoring defensive assets elsewhere. Citi Wealth’s Olaolu Aganga says the conflict forces a “defensive rethink,” prompting a shift away from European equities.

Earlier in the year, optimism rode on Germany’s pending fiscal boost and a wave of U.S. capital flowing into Euro‑zone funds. Morgan Stanley’s Jim Caron now warns that the March energy spike is a “detour” for a still‑healthy U.S. market, while UBS Wealth Management echoes a move to underweight Europe in favor of stronger earnings prospects.

Barclays analyst Ajay Rajadhyaksha notes that European valuations lack the cushion to absorb higher energy costs, whereas U.S. firms benefit from net‑exporter status. Consequently, investors are gravitating toward US megacap stocks, which offer lower price‑sensitivity to oil shocks. The shift leaves Europe’s anticipated rally in tatters, confirming that the region’s short‑term market outlook is now decidedly bearish.

With the dollar failing to act as a safe‑haven and political volatility in Washington rattling confidence, the defensive tilt appears permanent for now. Asset allocators are rebalancing portfolios toward high‑quality, low‑beta U.S. equities, leaving European funds to chase yield in a tougher environment. The Iran conflict has thus reshaped the inter‑market flow dynamics for the remainder of the year.