Morgan Stanley downgrades European energy stocks after Hormuz deal

Morgan Stanley Downgrades European Energy Sector After Hormuz Deal

Morgan Stanley on Friday cut its rating on European energy stocks from “overweight” to “equal-weight,” citing the partial reopening of the Strait of Hormuz under the US-Iran memorandum of understanding and a deteriorating earnings outlook for the sector. The move dropped energy from fourth to ninth place in the bank’s European sector model, marking a reversal from March when the firm had upgraded the sector to “overweight” on supply-risk concerns tied to the Middle East conflict.investing

A Geopolitical Trigger

The downgrade followed the signing of a 14-point memorandum of understanding between the United States and Iran on Wednesday, which mandates the reopening of the Strait of Hormuz to commercial shipping within 30 days and lifts sanctions on Iranian oil exports. The deal, brokered with Pakistani mediation, extends the ceasefire for 60 days while nuclear negotiations continue.apnews

Morgan Stanley doubled the weight of its Hormuz-reopening sensitivity component within its sector model, which had carried just 8% before the deal was announced. The firm’s historical analysis of geopolitical oil-price cycles — from the 1973 embargo to the Russia-Ukraine conflict — found that energy equities “tend to consistently underperform the index after reaching peak oil prices influenced by geopolitical events”.investing

Earnings Outlook Dims

The bank’s oil strategists expect Brent crude to remain “fundamentally anchored around $80/bbl from the fourth quarter through 2027,” well below the market consensus assumption of $88.50 per barrel for 2026. The breadth of earnings revisions for European energy over the past four weeks has already turned negative relative to the broader index, a signal Morgan Stanley views as a leading indicator of further downside.investing

Analysts also noted that recent upward revisions to MSCI Europe’s expected earnings-per-share growth for 2026 — from roughly 11% to 16% — were “primarily driven by the Energy sector,” creating a high baseline vulnerable to cuts. Six stocks were removed from Morgan Stanley’s top-50 combined stock screen, including BP, Repsol, and Neste, replaced by banks, utilities, and copper names.investing

Uncertain Road Ahead

Despite the downgrade, European energy stocks rose 1.2% on Friday as broader markets weighed uncertainty over the deal’s execution. Switzerland announced that planned follow-up talks between US and Iranian negotiators would not take place on Friday, and Vice President JD Vance canceled his trip to the venue. Morgan Stanley acknowledged the shift is “only reflected in equities and breadth, as investors await deal execution”.yahoo