By Michael Msika, Bloomberg markets live reporter and strategist
The outlook for European stocks is polarizing strategists, but on average, the verdict is underwhelming: there is no upside from here till year end.
Strategists believe the 7.6% advance in the Stoxx Europe 600 so far in 2023 will be as good as it gets. The benchmark index is set to fall to 451 points by year-end, according to the average of 16 forecasts in a Bloomberg strategist survey, implying a small drop of 1.3% from Wednesday’s close.
Goldman strategists joined peers at Deutsche Bank and ING in being the most bullish in our survey, predicting that the Stoxx 600 will climb to 480 points by year-end, implying gains of about 5%. By contrast, Bank of America strategists expect a slump of 15%.
“We see several supports for European equities: falling inflation, a peak in rates, positive real income growth in the second half of 2023 and 2024, and a starting point of weak positioning based on cumulative flows data,” says Goldman Strategist Sharon Bell in emailed comments. European stock valuations “remain unchallenging,” she adds.
The Goldman team is optimistic about European profits, highlighting strong momentum in earnings per share, while the valuation gap against US peers remains as wide as it was before the Federal Reserve started to raise rates in early 2022.
A decent year for European equities is being challenged. The Stoxx 600 has been stuck in a tight range since April as market participants increasingly question the outlook for growth. Meanwhile, anticipated stimulus programs and the post-Covid reopening in China have so far disappointed investors, while central banks have remained very hawkish.
Strategists at BofA say equities have benefited from strong global growth momentum thanks to a resilient US economy, and increasing fiscal support, but they expect the drag from tightening credit conditions to intensify, and for the fiscal impulse to fade. “We see scope for weakening US – and, hence, global – growth momentum, over the coming months,” says Strategist Milla Savova.
“This should led to widening risk premia, as well as renewed EPS downgrades, reversing the upgrades seen over recent weeks,” she adds, forecasting a 15% slump in the Stoxx 600 to 390 by year-end.
The majority of strategists expect the sustained campaign of central-bank interest rate hikes to stall the rally, given the lagging impact of monetary tightening on the economy and earnings. Company updates ahead of the start of the second-quarter earnings season have sent some worrying signals, with several chemicals and packaging firms warning of weak demand and destocking by customers.
Investors are bearish about equities in the near-term, but their view beyond that is more positive. According to a BofA fund manager survey published earlier this month, 73% expect weakness for the European market over the coming months in response to monetary tightening, but a majority of 52% now project gains over the next 12 months, up from 44% in May. They are gloomy about earnings, with 84% expecting European EPS to be pulled lower by slowing growth and fading inflation. Almost a third regard earnings downgrades as the most likely cause of a market correction.
“We see a very limited upside,” says Societe Generale Strategist Roland Kaloyan, who retained his 440 points target for the Stoxx 600 and sees the benchmark stuck in a 400-460 range for the year. “And the risk on the earnings growth is skewed on the downside with toppish margin and potential economic slowdown.”
