SAP lifts European tech as ECB policymakers flag September rate hike
European equities rose for a second week, led by a surge in SAP that offset broader tech volatility, while investors weighed looming ECB interest rate hikes against stretched AI valuations.
The pan-European STOXX 600 index closed 0.6% higher at 644.67, marking a second consecutive weekly advance. The broader market found its footing primarily through a strong recovery in technology shares, which added 1.7% after a turbulent few days.
German software group SAP rallied 10% to lead the gains, driven by second-quarter current cloud backlog growth that topped analyst forecasts. This provided a decisive counterweight to the prior session, when underwhelming updates from STMicroelectronics and BE Semiconductor triggered a sharp sell-off in semiconductor stocks.
The stark divergence in tech earnings underscores a growing fragmentation in how investors value the AI trade. Market participants are increasingly forced to distinguish between companies successfully monetizing AI and those merely absorbing heavy upfront costs. "The two big problems for the big tech companies are that capex is no longer being funded out of free cash flow alone and that cheaper open-source AI is seriously threatening business models," said Deutsche Bank analysts led by Jim Reid.
Even with recent volatility, the STOXX 600 technology sector has climbed nearly 17% this year. However, it continues to lag the energy sector, which has surged approximately 32%. Energy equities failed to extend those gains on Friday despite Brent crude remaining above $100 a barrel. Instead, a 6.4% plunge in Neste dragged the index lower after the Finnish biofuel producer and refiner posted second-quarter core profit that fell slightly short of expectations, demonstrating that elevated commodity prices do not automatically translate to equity outperformance.
Underpinning the equity market's calculations is a renewed tightening threat from the European Central Bank. Three policymakers signaled on Friday that further rate increases may be necessary as inflation risks persist. This warning arrived just a day after the central bank left rates unchanged but maintained a clear option for a September hike.
For portfolio managers, the combination of these factors creates a complex backdrop. They must simultaneously evaluate shifting fundamentals in the tech sector—where capital expenditure is outpacing free cash flow—and prepare for the possibility that borrowing costs could rise again before the year ends.
