Why Wall Street strategists are betting on European equities

The August turmoil in financial markets has left strategists unfazed about the outlook for European stocks, which are expected to scale new peaks this year.

The Stoxx Europe 600 Index is seen ending the year at 535 points — about 4.6% above Friday’s close, according to the median estimate in a Bloomberg survey of 16 strategists. That implies surpassing the record high set back in May.

European stocks have been quick to recoup losses as global markets rebounded after the wild volatility episode at the start of August. Mixed economic data and a dramatic unwind of crowded trades were not enough to derail the rally durably, with investors banking on interest rate cuts to support equity valuations. Meanwhile, the earnings season was reassuring. That kept strategists relatively bullish.

 “Our target is based on zero earnings growth this year and next so it’s not ambitious,” said UBS Group AG strategist Gerry Fowler, who sees the Stoxx 600 at 540 by year-end. The market consensus is for about 4% earnings growth this year and 10% in 2025. “The driver, therefore, is valuations. Lower bond yields help but credit spreads continue to grind tighter too.”

Europe Inc. enjoyed a better-than-expected earnings season in the second quarter, with MSCI Europe companies posting a 2.3% rise in profits. That was the first year-on-year increase since early 2023, according to data compiled by Bloomberg Intelligence. Yet that strength hasn’t flowed through to stock prices, with the benchmark still down about 2% since the season began mid-July amid lingering worries about the economy.

Analysts have been reluctant to cut their forecasts, and that’s keeping valuations in check. The Stoxx 600 is trading below its 10-year average forward price-to-earnings ratio, even after the latest bounce. 

While he expects stocks to be slightly down from current levels, Societe Generale SA strategist Roland Kaloyan sees limited downside. The market should find support from central bank rate cuts, cautious spending by corporates, healthy balance sheets, as well as the lack of overcrowding in Europe. “Investors have been on the sidelines on European equities, helping to prevent excessive valuations,” he said.

Over the past couple of months, the range of forecasts has narrowed, with less downside seen based on the most bearish targets. Bank of America Corp. strategists were the latest to raise their view, lifting their target to 475 from 460, though they kept their cautious view. That leaves TFS Derivatives and JPMorgan Chase & Co. as the most bearish strategists.

“We remain negative on European equities and cyclicals versus defensives,” Bank of America strategists led by Sebastian Raedler said. “The market ructions in response to the weak July payrolls print highlight how bad macro data is once again bad news for the market, as investors‘ focus has shifted from inflation worries to growth concerns.”

Investors are worried in the near term. According to the August Bank of America fund managers survey, 48% of European investors expect near-term downside for European equities, up from 18% in July, with the share that sees near-term upside falling to 45% from 78%. That implies a net 4% are now seeing a near-term pullback, compared with a net 60% seeing upside last month. Longer-term, conviction is still positive, with 62% seeing upside over 12 months — though that’s also down from 75% last month.