European stocks enjoy their surge

Key points

• European markets recently staged a massive short-term breadth thrust, with the aggregate percentage of stocks trading above their 10-day moving average surging from below 25% to over 75% in under a month.
• While this rapid momentum burst yields passable win rates for the STOXX Europe 600, the risk/reward profile remains skewed, with the frequency of severe drawdowns outpacing massive gains in the near term.
• Historically, intense breadth thrusts in Europe actually serve as a highly potent bullish macro signal for US equities, with the S&P 500 consistently dominating performance across medium-to-long-term horizons.

A breadth surge in Europe

European equities have notched multiple record highs in the post-pandemic era, with major benchmarks like the UK's FTSE 100 and Germany's DAX hitting fresh peaks this year. However, driven by geopolitical uncertainty in the Middle East and a subsequent spike in energy prices, European markets suffered a sharp drawdown in March.

Recently, major developed European markets have staged a massive rally fueled by broad-based participation. When screening foreign index breadth using the percentage of constituents trading above their 10-day moving averages, markets displaying notable outperformance include the UK, Switzerland, France, and Germany. The underlying equity momentum across these regions is striking.