(Bloomberg) -- European equities turned negative, tracking a sharp drop in US stocks, as traders reassessed the path of interest rates. 

The Stoxx Europe 600 index was down 0.8% by the close in London. The FTSE 100 pared gains after hitting closing record levels earlier in the day, while still outperforming most European markets. The US 10-year Treasury yields surged to 4.4%, their highest level since November.

Markets are forecasting fewer rate cuts than the Federal Reserve this year, after a couple of recent data points from the past few days pointed to strength in the US economy. Fed Chair Jerome Powell on Friday said the US central bank isn’t in any rush to cut interest rates as policymakers await more evidence that inflation is contained.  

Shares in energy companies such as Shell Plc and BP Plc outperformed as oil advanced, against a backdrop of OPEC+ cuts, strong demand and heightened geopolitical risk. Miners also rose, with the likes of Glencore Plc and Rio Tinto Plc heading higher. Among other individual movers, BE Semiconductor Industries NV jumped after an upgrade from analysts at Barclays Plc.

European stocks just marked their best quarter in a year as traders remained optimistic about the economy and that interest rates would come down soon. The spotlight is turning to corporate earnings to drive the next leg of the rally in the region’s shares. Analysts expect profits to rebound 4% in 2024 after slumping last year, according to data compiled by Bloomberg Intelligence. 

“We remain bullish for the rest of 2024, mainly because leading indicators and lower rates point to an economic recovery in the second half,” said Susana Cruz, a strategist at Liberum. “Although the re-rating has started for some cyclical sectors, analyst earnings-per-share estimates do not reflect the improved outlook yet, so there’s still value in sectors such as construction.”

For more on equity markets:

  • Earnings Are Next Test for Europe’s Record Rally: Taking Stock
  • M&A Watch Europe: Aluflexpack, Dala Energi AB, Virgin Money, UBS
  • US Stock Futures Little Changed; PVH Falls

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--With assistance from Sagarika Jaisinghani and Michael Msika.

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