Barclays shifts to 'peace target' of 670 for STOXX 600, drops Europe underweight

June 17 (Reuters) - Barclays raised its year-end target for the STOXX 600 index to 670 from 620 on Wednesday and dropped its bearish view on regional stocks, citing lower oil prices and the possibility of a U.S.-Iran deal improving the economic outlook.

The pan-European stock index is trading near a record high after the United States and Iran reached a preliminary peace agreement earlier this week to reopen the Strait of Hormuz and end the three-month conflict in the Middle East. The index has reclaimed all of its post-conflict losses and is up about 7.4% year-to-date.

European equities have lagged global peers since the onset of the conflict, weighed down by energy shocks and tighter financial conditions, but Barclays now sees the region's near-term risk-reward improving as those pressures begin to ease.

Barclays said its move to the "peace target" reflects expectations of stronger earnings growth and a partial recovery in valuations as geopolitical risks recede in the second half of the year. It also closed its "Underweight" stance on European stocks.

Many European sectors remain below pre-war levels, even as investors have rotated into some of the segments hardest hit by the conflict.

The new target implies an upside of around 5.3% from Tuesday's close of 636.

The brokerage added that falling oil prices and stabilizing macro indicators could support a rebound in Europe, with earnings momentum likely to hold up as tail risks diminish. It also flagged potential broadening in global market leadership beyond technology-heavy U.S. stocks.

Barclays also turned more constructive on parts of the consumer space, upgrading luxury to overweight, even as luxury stocks are among the worst-performing on the STOXX this year, while downgrading healthcare to underweight.

Earlier this week, Deutsche Bank turned "Neutral" from "Overweight" on U.S. versus European equities, saying a narrowing growth gap and easing tailwinds for U.S. stocks could reduce their relative outperformance.

(Reporting by Rashika Singh in Bengaluru; Editing by Rashmi Aich)