European shares near record high as lower oil prices boost sentiment

Europe's benchmark STOXX 600 gained on Tuesday, hovering near a record high, as a sustained drop in oil prices and easing odds ‌for a possible military escalation between the US and Iran supported risk appetite. The STOXX 600 index ended 0.27% higher at 658.32 points, with banks up 1.7% and leading sectoral gains. Spain's lender-heavy benchmark index outperformed regional bourses, adding 0.98%.

The pan-European benchmark closed within 0.8% of its record high, last reached in early August, on ‌renewed hopes that easing Middle East tensions could curb energy-driven inflation worries and dampen expectations for higher interest rates. While it was not the first ‌time investors had been promised a swift end to the conflict, Democrats' sweep of the US Congress during midterm elections last week have raised hopes for an imminent resolution.

Brent crude fell to a two-month low after US officials downplayed the need for additional military action against Iran. Analysts said the relatively cheaper valuation of European equities compared with US stocks also aided sentiment.

"Valuations across ⁠European equities ​and the indices are much, much cheaper ⁠than the US by a significant degree... investors are looking at corporations in the UK and Europe, and they see bargains there," said David Morrison, senior market analyst at Trade Nation. A stronger-than-expected ⁠corporate earnings season has aided the rally, with the region's lower exposure to AI stocks further supporting gains amid uncertainty surrounding the sector.

The earnings growth gap between Europe ​and the US narrowed to its smallest level in more than three years this reporting season, while Europe matched or outperformed the US ⁠in six sectors, Deutsche Bank said. Third-quarter earnings are expected to rise 25%, compared with a previous estimate of around 16%, per LSEG data. Among stocks, Edenred rose 6.4% to the top of the STOXX ⁠600 ​index after a court judgement showed a Brazilian judge suspended part of new meal voucher rules for companies in a local lobby group, including Pluxee and Edenred's Ticket.

Investors also weighed a fresh batch of earnings on Tuesday. Potash producer K+S reversed earlier gains and closed 4.5% lower despite beating third-quarter ⁠earnings expectations.

Sunrise Communications fell 4.1% after the telecom operator reported quarterly earnings. Oil stocks were the biggest laggards, down 1.6%.

Meanwhile, investors expect the European Central Bank ⁠to wait for more data through the ⁠year-end and potentially hike rates by February next year, despite the recent drop in oil prices. Across the Atlantic in the US, the October CPI reading came in hotter-than-expected, reinforcing expectations that the Federal Reserve would hike rates at its ‌meeting next month.