Is a tactical pause looming for Europe equities into earnings?

Morgan Stanley warns a near-term tactical pause for European equities as markets await clarity on the Strait of Hormuz and shift focus to company earnings. While the bank remains constructive on Europe in the medium term after signs of Middle East de‑escalation, it sees investor sentiment stretched and a late-stage breadth expansion that could reverse. The EU cyclicals-vs-defensives ratio has recovered ~80% of its year-to-date losses. MS models show a $90/bbl oil price would lift European EPS by roughly 10% (about 70% of the gain from Energy). The bank expects higher stock-level dispersion, a reversion to bottom-up stock selection, a tilt back to defensives, and sector skew: beats in Energy/Utilities/Banks/Telecoms and misses in Luxury/Autos/Staples.