The index fell 3.2 per cent in a single session, placing it firmly in correction territory — a decline of more than ten per cent from its recent peak. The sell-off was broad and brutal, sparing neither defensive stalwarts nor growth darlings. The DAX dropped 3.7 per cent. The CAC 40 shed 3.5 per cent. London's FTSE 100, theoretically cushioned by its overweight in energy and commodity stocks, still lost 2.1 per cent, because even oil companies decline when investors decide that the world itself is the problem.

The immediate trigger was Donald Trump's ultimatum to Iran over the Strait of Hormuz, followed by Tehran's refusal to be ultimated. But corrections are never truly caused by single events. They are enabled by conditions, and the conditions in European equities had been ripe for a reckoning.

Begin with valuations. The Stoxx 600's forward price-to-earnings ratio had climbed to 14.8 by mid-February, its highest level in two years. This was not absurd by American standards — the S&P 500 has not traded below a 17 forward P/E since the early pandemic — but it was elevated for a market whose earnings growth has consistently disappointed. European companies have generated roughly two per cent annual earnings growth over the past five years, adjusted for inflation. The multiple they commanded in February implied something closer to eight per cent. The gap between price and reality is where corrections live.

Then there is energy. Europe's relationship with energy costs is, to use a clinical term, pathological. The continent imports approximately sixty per cent of its natural gas and ninety per cent of its crude oil. When Brent crude leaps to $97 on Hormuz fears, the direct cost hits European industry with the force of a regressive tax. German manufacturers, already struggling with energy costs two to three times those of their American competitors, face the prospect of another margin squeeze. The chemicals sector — BASF, Covestro, Evonik — fell between four and six per cent on Monday.

Airlines were predictably among the worst performers. Ryanair, Lufthansa, and Air France-KLM each declined more than five per cent. Jet fuel constitutes roughly thirty per cent of airline operating costs, and hedging programmes, while helpful, provide only temporary insulation. The market's judgement was swift: if oil stays above $90 through the summer travel season, European airline margins will compress to levels that make investors question why they bother.

The banking sector, which had been the star performer of the European rally, also buckled. The Euro Stoxx Banks Index fell 4.1 per cent, its worst day since the brief panic over Credit Suisse in March 2023. The logic is indirect but sound: higher energy prices feed into inflation, which complicates the European Central Bank's rate-cutting trajectory, which in turn threatens the loan growth and credit quality that had underpinned the banking recovery. UniCredit, Société Générale, and BNP Paribas all fell more than four per cent.

What the ECB does next matters enormously. The central bank had been on a steady path of quarter-point rate cuts, bringing its deposit rate to 2.25 per cent by March, with markets pricing in two further cuts by September. That pricing has now shifted. Interest rate swaps on Monday morning still showed expectations for further easing, but the implied probability of a June cut fell from 82 per cent to 61 per cent. If oil prices remain elevated, headline inflation — which had been trending towards the ECB's two per cent target — will reaccelerate, forcing Christine Lagarde into the unenviable position of choosing between supporting growth and defending price stability. This is not a new dilemma for European central bankers, but it is one they had hoped to avoid in 2026.

The bond market, as is its habit, told the more nuanced story. German Bund yields fell as investors sought safety, but peripheral spreads — the gap between Italian and German ten-year yields — widened to 165 basis points, up from 140 a week ago. This is not crisis territory, but it is the kind of widening that signals anxiety about the fiscal resilience of Southern European economies, which are more exposed to energy price shocks and less able to absorb them.

For the Nordic economies, the picture is characteristically mixed. Norway, Europe's largest oil and gas exporter, is the rare beneficiary: Equinor's share price rose 4.3 per cent, and the Norwegian krone strengthened. Sweden and Finland, net energy importers both, felt the familiar sting. Stockholm's OMX 30 fell 2.8 per cent, dragged down by industrials and consumer discretionary names.

The question that European investors must now answer is whether this correction is a healthy repricing or the beginning of something deeper. The bull case rests on the assumption that the Hormuz crisis remains rhetorical — that neither the United States nor Iran wants an actual conflict that would close the strait. If tensions ease, oil falls back, the ECB resumes cutting, and European equities resume their climb from more attractive levels. This is the scenario that most sell-side strategists will publish in their notes this week, because optimism is their product.

The bear case is less comfortable. If the crisis escalates, or merely persists, Europe faces a toxic combination of higher energy costs, stalled monetary easing, and diminished corporate earnings — a replay, in structure if not scale, of the 2022 energy crisis that followed Russia's invasion of Ukraine. European industry never fully recovered from that shock. A second one, arriving before the first has fully healed, could push the continent towards the recession that it has so far narrowly avoided.

There is a third possibility, which is perhaps the most likely: the crisis lingers in a state of unresolved tension, neither escalating to open conflict nor resolving into calm. In this scenario, oil prices settle in a range between $88 and $95, high enough to cause pain but not catastrophe. European markets drift sideways, unable to rally on uncertainty but unwilling to collapse absent actual disruption. This is the grey zone in which European equities have spent much of the past decade — not quite crisis, not quite confidence, just the persistent hum of continental anxiety.

One recalls the observation, attributed to various wits, that Europe will always do the right thing after exhausting all other options. The same might be said of European equity markets: they will find fair value, but only after overshooting in both directions, and only after extracting maximum discomfort from everyone involved.

The Stoxx 600 closed Monday at 478.3. Whether that proves to be a floor or a way station depends on events unfolding six thousand kilometres away, in a strait most European investors could not locate on a map. Such is the architecture of modern finance: local in sentiment, global in vulnerability, and perpetually surprised by risks it has been warned about for decades.