Wall Street Strategists Bullish on European Equities Despite August Volatility

Wall Street strategists are maintaining an optimistic outlook on European equities, despite the market volatility experienced in August. According to a survey conducted among 16 strategists, the STOXX Europe 600 Index is expected to end the year at 535 points, approximately 4% higher than Monday's closing. This projection suggests that the index will surpass the historic high set in May.

The swift recovery of European stocks following the early-August market turmoil underscores their resilience. Mixed economic data and significant trading liquidations have done little to derail the rally. Investors are hopeful that interest rate cuts will sustain equity valuations. Additionally, a reassuring earnings season has kept sentiment buoyant.

UBS strategist Gerry Fowler forecasts the STOXX 600 Index reaching 540 points by year-end. He stated, “Our target is based on zero earnings growth for the next two years, making it a non-aggressive estimate. Valuation is the primary driver, aided by lower bond yields and narrowing credit spreads.” The market generally anticipates a 4% earnings growth this year and 10% in 2025.

European companies' Q2 earnings have exceeded expectations, with MSCI Europe companies reporting a 2.3% profit growth, marking the first year-over-year increase since early 2023. Nonetheless, lingering economic concerns have dampened stock prices, leaving the index about 2% lower since mid-July. Analysts' reluctance to downgrade earnings forecasts has suppressed valuations. Even after the recent recovery, the STOXX 600’s forward P/E ratio remains below its 10-year average.

While Societe Generale strategist Roland Kaloyan predicts a slight dip from current levels, he sees limited downside. The market is expected to be supported by the ECB’s rate cuts, corporate cautious spending, healthy balance sheets, and the absence of overcrowding in European equities. “Investors have been cautious about European stocks, which helps prevent overvaluation,” he commented.

In recent months, the range of target levels for European stocks has narrowed, with even the most pessimistic analysts revising their forecasts upward. For instance, Bank of America's strategists recently raised their target for the STOXX 600 from 460 points to 475 points, although they remain cautious. This keeps TFS Derivatives and JP Morgan as the most bearish among the strategists.

Despite short-term worries, long-term confidence in European equities remains strong. Bank of America’s August survey of fund managers shows that 48% of European investors expect a short-term decline, up from 18% in July. Conversely, only 45% expect an increase in the near term, down from 78%. This shifts the net sentiment to a 4% negative outlook for the near term from a 60% positive outlook the previous month. For the year ahead, 62% of respondents anticipate market gains, a decrease from 75% in the prior month.

Analyst Michael Msika noted that strategists share a broad consensus: European equities are likely to hit new heights again. The August market turbulence has not shaken their positive outlook for the region. With global markets rebounding from early August’s significant volatility, European stocks have swiftly regained ground. Mixed economic data and sudden liquidations from crowded trades have not been enough to sustain the rebound. Investors are banking on rate cuts to support valuations, while a strong earnings season has kept optimism alive.