By Purvi Agarwal
July 31 (Reuters) - European shares closed lower on Friday, but posted monthly gains as strong corporate earnings buoyed markets helping them weather a month of Middle East hostilities and artificial intelligence-related jitters.
The pan-European STOXX 600 index inched down 0.1% at 649.19 points. The index hit its highest level on record earlier in the session but gave back those gains.
On Friday, Universal Music Group slumped 25.4%, marking its biggest one-day loss on record, after
its first-half results. The STOXX 600 media index lost 5.5%.
Technology stocks rose 0.3%, but pared some gains from earlier in the session. This week, quarterly earnings from U.S. Big Tech painted a mixed picture as Microsoft surged after signs its AI investments were paying off, while Meta was punished as its free cash flow saw a drop due to its spending plans.
Concerns that hefty spending on AI buildouts and their returns not materializing at the pace markets expected have raised scrutiny of valuations in the sector, leaving it vulnerable to wild swings.
UBS analysts said in a note they estimate operating cash flow at hyperscalers will be overtaken by their cash capex, raising the risk of AI spending in 2028 coming in below 2027 levels - a negative for semiconductors.
"We remain constructive on the AI growth story, but believe investors should manage concentration risk by broadening their exposure to defensive tech stocks," they said.
Energy stocks added 1.2%, the biggest jump among sectors helped by an uptick in oil prices. The sector is the biggest percentage gainer on the STOXX 600.
Hostilities in the Middle East escalated this month, with Brent crude topping $90 a barrel earlier in the week. However, robust corporate earnings helped offset the impact from these, helping the STOXX 600 notch both weekly and monthly gains.
This week, U.S. Federal Reserve chief Kevin Warsh said policymakers were committed to bringing inflation down, after a divided central bank left interest rates on hold, leaving markets with little clarity on the next likely move.
The Euro zone inflation ticked up in July, bolstering the chances of another rate hike from the European Central Bank in 2026, after it raised the benchmark rates by 25 basis-point at its June meeting.
Meanwhile, earnings were in full swing in Europe. Teleperformance jumped 13.2% after the outsourcing firm confirmed its 2026 targets.
Puma's shares fell about 2.5% as investors were disappointed that it did not upgrade its outlook following a narrower-than-expected second-quarter operating loss.
Credit Agricole gained 2.6% after posting better-than-expected second-quarter earnings.
IG Group dropped 14.4% after it agreed to acquire U.S. daily fantasy sports and prediction markets operator Underdog for up to $1.3 billion.
(Reporting by Purvi Agarwal and Avinash P in Bengaluru; Editing by Mrigank Dhaniwala, Vijay Kishore and Shailesh Kuber)
