Will STOXX 600 total return outperform S&P 500 total return through Q3 2026?
The Condition
Fed cuts rates by at least 50bp total by September 2026 FOMC (to ≤3.25%)
Our Ensemble Estimates
Given Fed cuts ≥50bp by Sep: Will STOXX 600 total return outperform S&P 500 total return through Q3 2026?
Given Fed disappoints on cuts: Will STOXX 600 total return outperform S&P 500 total return through Q3 2026?
Causal Effect
Fed rate cuts worth ~10pp to European equity outperformance — driven by portfolio rotation and carry trade reversal, partially offset by impaired eurozone credit and weak consumption
Why This Matters
Tests whether portfolio rebalancing flows favor European equities as the Fed-ECB rate differential narrows. The analysis identifies carry trade reversal and portfolio reallocation as secondary transmission channels behind the dominant FX channel. Fund managers are at their lowest USD exposure since 2006, suggesting structural capital flow rebalancing toward non-US assets. If the Fed delivers ≥50bp of cuts, the narrowing differential reduces the carry advantage of US assets, and further EUR appreciation would boost USD-denominated returns of European equities for global investors. However, impaired eurozone credit conditions (BLS +7% net tightening) and weak domestic demand may constrain European corporate earnings independently of the FX benefit.
Resolution Criteria
STOXX 600 total return index (gross, EUR-denominated) percentage change from December 31, 2025 to September 30, 2026 exceeds S&P 500 total return index (gross, USD-denominated) percentage change over the same period. Resolution uses Bloomberg or MSCI official total return indices.
Source Analysis
Portfolio rebalancing and carry trade reversal support EUR-denominated assets as rate differential narrows