The Federal Reserve’s rate cut has sent European stocks back near their record highs and strategists surveyed by Bloomberg expect the rebound to continue.
The Stoxx Europe 600 Index jumped the most in six weeks following the half-point cut. It’s seen ending the year at 534 points — about 2.5% above Thursday’s close, according to the median estimate in a poll of 17 strategists.
Better yet, 40% of those surveyed — Oddo BHF, Barclays Plc, Citigroup Inc, Deutsche Bank AG, HSBC Holdings Plc, UBS Group AG and UniCredit SpA — have a target of at least 540 points, implying a 3.5% rally.
The size of the Fed cut “raises the odds of a soft landing in the US,” said UBS strategist Gerry Fowler. “This is important for European equity valuations because it means lower bond yields don’t get offset by rising risk premia for now.”
The strategist’s 540 end-year target is based on a “little more valuation expansion” as the discount rate falls. “Earnings growth remains weak, however,” he said, hoping for an improvement in consumer goods demand in 2025 over support from monetary easing in rate-sensitive markets like the UK, Scandinavia and Spain.
The bouts of volatility seen in early August and early September appear to be long-gone. European stocks are nearing record highs, with expectations that the global economy will make a soft landing, while central banks cut borrowing costs as inflation continues to cool. Lower rates are supporting valuations but better economic growth may be needed to sustain the rally.
“In Europe, growth has been sluggish and is expected to remain so,” said Roland Kaloyan, head of European equity strategy at Societe Generale SA. “In this context of low macroeconomic growth, disinflation, and margin normalization, we expect modest earnings growth of 5% per year over the next two years,” which he said is lower than the consensus at around 10% per year.
That’s the reason why the strategist is keeping a 500 point target this year, and set a 530 target for 2025, warning that the market is likely to be range-bound, like it has been in the past six months, but offering more opportunities to active investors. “Political uncertainties and renewed concerns about the economic cycle could be the main sources of volatility,” Kaloyan said.
Approaching the third-quarter earnings season, analysts have started to cut earnings estimates again, but based on the Citigroup earnings revision index, the number of cuts is looking more aggressive than in past seasons. The revision index for Europe ex-UK just had its lowest print since January, while in the UK, the drop is even sharper.
The economy is a wild card as manufacturing data in Europe continues to contract, while economic surprises are in negative territory. A recovery in China is a question mark, and the US election is adding more uncertainty into the mix, with tariffs policies that could harm Europe and stun global growth in play, especially in the event of another Trump administration, according to Bloomberg Intelligence.
“While our Stoxx 600 market target of 540 sees some modest upside by year end, we think volatile conditions could remain in place in the short term,” said Citigroup strategist Beata Manthey. “In line with this view, our sector recommendations have had a growth/defensive tilt since mid July. While US rate cuts should be supportive for equities globally, several headwinds remain.”
This article was provided by Bloomberg News.