(Bloomberg) -- European stocks dropped slightly on Monday following strong gains in the first half of the year as cyclical sectors climbed while investors mulled the path of monetary policy and economic growth. 

The Stoxx Europe 600 Index fell 0.2% by the close in London, having earlier risen as much as 0.4%. Energy shares got a boost after oil rallied as Saudi Arabia and Russia extended oil supply cuts. Miners and banking stocks advanced, while consumer products and health care underperformed. 

Among individual stocks, UK pharma giant AstraZeneca Plc slumped as results from a high-level study of a new cancer medicine raised concern the drug might not work as well as anticipated. Nokia Oyj climbed after the telecom equipment maker announced a new multi-year patent agreement with Apple, six months before the current contract expires. 

European equities rallied nearly 9% in the first half of the year, fueled by resilient earnings and bets that easing inflation will spur central banks to pause rate hikes. However, some strategists are concerned that recessionary headwinds and stubbornly hawkish monetary policy will put a damper on the second half. Data on Friday showed the Federal Reserve’s preferred measures of US inflation cooled in May and consumer spending stagnated. 

“The first half saw a normalization moment from the excess losses that we have seen in 2022,” said Alberto Tocchio, a portfolio manager at Kairos Partners. “We are finally witnessing the expansion of the market participation after six months of very tiny breadth. This is happening because of the continuous improvement of macro data in the US but also because rates are moving up.”

READ: It’s Getting a Lot Harder to Chase the Stock Rally From Here On

In the latest data news, US factory activity contracted for an eighth month in June, slipping to the weakest level in more than three years. 

Investors are also awaiting the upcoming earnings season. JPMorgan Chase & Co. strategists said profit resilience will be put to the test in the second half, with corporate pricing power likely to weaken from here. 

“The mood as captured by our metrics of long-term investor flows and holdings is skeptical,” Michael Metcalfe, head of macro strategy at State Street Global Markets, said by email. “Investors had been reducing risk in the past the couple of months, especially in cyclical sectors, which suggests a latent concern about the recession which is yet to arrive.”

“With all the PMI data in focus and European growth fears been realized, that fits nicely with the idea that investors are not quite as exuberant as the price action suggests,” he added.

For more on equity markets:

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  • US Stock Futures Little Changed

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