How European Stocks Can Withstand Rising Energy Prices

European stocks may be better positioned to withstand rising oil and gas prices than they were during the energy crisis of 2022, according to portfolio managers, as companies adapt to inflationary pressures and benefit from changes in the composition of regional stock indexes.

The latest increase in energy prices has renewed concerns about Europe’s reliance on imported fuel and the potential impact on businesses as winter approaches. However, investment professionals say many large European companies have reduced their direct exposure to energy costs, diversified their supply chains and strengthened their ability to manage inflation.

The situation differs from 2022, when Russia’s invasion of Ukraine triggered a sharp increase in natural gas prices, raising fears of recession and undermining concerns about Europe’s industrial competitiveness.

While some sectors remain vulnerable, analysts point to relatively low direct energy costs for many listed companies, a greater weighting of sectors that can benefit from higher prices and continued investment in Artificial Intelligence as factors supporting European equities.

Energy Costs Represent a Small Share of Corporate Expenses

For many large European companies, the immediate financial impact of higher energy prices may be manageable because energy accounts for a relatively small proportion of their overall costs.

Ciaran Callaghan, head of European equity research at Amundi, said the initial impact on major listed companies was limited compared with the pressure facing consumers and smaller businesses that have fewer options for diversifying their energy supplies.

Chemicals, materials and airlines remain among the sectors most exposed to energy price increases. However, Morgan Stanley estimates that direct energy expenses represent only a low single-digit percentage of costs for many industrial companies.

Deutsche Bank estimates that energy costs account for approximately 1% of sales across companies in the STOXX Europe 600 index.

These figures suggest that many large businesses have some capacity to absorb higher energy expenses without facing an immediate, substantial hit to their financial performance. Nevertheless, the impact varies considerably by industry, with energy-intensive manufacturers and transport companies facing greater risks.

European Stock Index Composition Offers Support

The changing composition of European stock indexes is another factor helping the market withstand higher energy prices. According to Morgan Stanley, sectors that can benefit from rising energy prices account for 36% of earnings in the MSCI Europe index, compared with approximately 6% generated by sectors considered vulnerable to higher prices.

Energy companies, utilities and banks are among the potential beneficiaries. Their combined share of the index’s market capitalisation has increased to 25% from 16% five years ago, reflecting a shift in the structure of European equity markets.

Thomas O’Hara, investment director for European equities at GAM Investments, said European markets were less vulnerable than in the past because of changes in index composition and companies’ greater experience in managing energy-driven inflation.

Energy-intensive industries, including chemicals, steel and automobiles, now represent a smaller proportion of European indexes, O’Hara said. Banks, meanwhile, account for a larger share and can benefit from higher interest rates that often accompany periods of elevated inflation, although the effects depend on lending conditions and the broader economic environment.

This sector mix may help cushion the overall market against rising fuel costs, even as individual businesses continue to face pressure.

Artificial Intelligence Investment Supports Earnings

Investment linked to artificial intelligence is providing another source of support for European companies, particularly industrial businesses and technology suppliers involved in the development of AI infrastructure.

Amundi’s Callaghan said the AI boom was feeding into European markets and helping offset some of the pressure created by higher energy prices.

According to Morgan Stanley, companies that directly benefit from AI-related capital spending account for approximately 8% of MSCI Europe earnings.

Demand associated with AI infrastructure can support suppliers of equipment and other industrial products, potentially helping them maintain earnings growth despite higher operating expenses. This investment trend gives some European companies a source of demand that is separate from the region’s domestic economic conditions.

However, the benefits are not distributed evenly across the market. Companies without direct exposure to AI-related spending may remain more dependent on consumer demand, industrial activity and energy costs.

Global Operations Reduce Exposure to European Economic Conditions

European stock markets do not simply reflect the performance of domestic economies, because many listed companies generate substantial revenue from international markets.

Gilles Guibout, head of European equities at BNP Paribas Asset Management, said European listed companies were global businesses rather than direct proxies for their home economies.

Many companies have also moved production closer to their end markets and diversified their supply chains. These changes can reduce exposure to regional disruptions and help businesses respond more flexibly when energy prices or transportation costs rise.

Goldman Sachs estimates that Europe accounts for 42% of the revenue generated by STOXX Europe 600 companies. The remaining revenue comes from markets outside the region, giving many businesses exposure to international demand.

This global reach can help offset weaker conditions in Europe, although international operations also expose companies to risks in other economies and currencies.

Companies Have Adapted Since the 2022 Energy Crisis

European businesses have spent the past four years improving their ability to manage energy price volatility and inflation, according to GAM Investments’ O’Hara.

Companies have strengthened supply chains, improved procurement contracts and developed more effective approaches to managing sudden increases in operating costs. Europe has also expanded liquefied natural gas imports, developed alternative supply routes and increased the use of hedging, renewable energy and energy-efficiency measures.

These changes may help companies manage current pressures more effectively than they did during the 2022 energy shock.

Mario Montagnani, senior investment strategist at Vontobel, said energy risk management had become a structural part of business operations rather than a temporary response to an unexpected crisis.

Companies can use hedging arrangements to reduce their exposure to certain price fluctuations, while diversified supplies and renewable energy investments may reduce dependence on individual fuel sources. However, these measures cannot eliminate the impact of a prolonged increase in energy prices.

Goldman Sachs data also indicate that, since the Iran war began in February, earnings estimates have been revised upward across all sectors except consumer-related industries. The pattern suggests that earnings expectations have remained relatively resilient despite geopolitical and energy market uncertainty.

Higher Oil and Gas Prices Still Pose Risks

Despite these sources of support, European companies are not immune to a prolonged period of expensive energy. Some investment managers warn that markets may be underestimating the potential consequences if oil and gas prices remain elevated into 2027.

Anthony Penel, European equities manager at Edmond de Rothschild Asset Management, said there were limits to companies’ ability to absorb sustained increases in energy costs and warned that markets appeared too complacent about the risks.

If high prices persist, the damage could spread beyond companies’ direct energy bills. Higher fuel costs can contribute to inflation, potentially prompting tighter financial conditions or delaying interest rate cuts. Higher borrowing costs can then weigh on investment, while rising household expenses can reduce consumer spending.

Smaller companies and energy-intensive industries may be particularly vulnerable because they can have less flexibility to absorb additional expenses or pass them on to customers.

Higher energy prices could therefore affect European equities gradually through weaker demand, more expensive financing and pressure on profit margins, even if the initial impact on large listed companies remains limited.

European Stocks Face a More Resilient but Uncertain Outlook

European equities have several potential buffers against the latest energy price increases, including lower direct energy costs at many large companies, a greater weighting of sectors that can benefit from inflationary conditions, international revenue streams and investment linked to artificial intelligence.

Businesses have also become more experienced in managing energy market volatility since the crisis triggered by Russia’s invasion of Ukraine in 2022. Diversified supply chains, alternative energy sources and improved risk management may help limit the immediate impact of higher prices.

However, resilience should not be confused with immunity. The longer oil and gas prices remain elevated, the greater the risk that inflation, borrowing costs and weaker consumer demand will undermine corporate earnings.

For investors, the outlook will depend not only on energy prices themselves but also on how long they remain high, how companies manage their costs and whether economic growth and AI-related investment continue to support earnings across European markets.