European Stock Markets
U.S. stocks at record highs. Bitcoin soaring more than 1,700% in a
year. And emerging markets equities on track for their best annual
performance since 2009.
After a bumper 2017 for several assets, traders can easily be forgiven for worrying about financial bubbles and questioning if 2018 can bring any returns at all. But while money managers, by one measure, are the most bearish on stocks since the financial crisis, there’s one region that’s lagged behind this year and but could outperform in 2018: Europe.
In the year-ahead outlooks from the major investment banks, the continent emerges as one of their favorite plays, with four things swinging in the Europeans favor: 1) Earnings are great, 2) the economy is also great, 3) the ECB is still super accommodative, and 4) the worst of the euro strength is in the past.
“The euro area is enjoying a period of robust and above-trend synchronized growth, across both geography and industry,” Citi said in its year-ahead report, forecasting a 17% rally for the Stoxx Europe 600 SXXP, -0.15% next year.
While many investors worry that we are late in the cycle, Citi economists think that we are ‘either later in the recovery phase of the business cycle or early in the boom phase’. They expect a pickup in investment, which is usually facilitated by bank lending
That’s partly because the euro EURUSD, +0.0421% woke from its slumber this year and because Europe is relatively low on tech companies, which have been a key factor in the global rally.
Next year, however, the investment banks largely expect European stocks to race past their U.S. counterparts and perform more in line with emerging markets. Here’s an overview of their forecasts.
A 7.2% average forecast may not blow anyone’s socks off in a global 2017 context, but the strategists warn that the stellar returns seen this year are unlikely to be repeated in 2018.
After a long period of stagnation among European companies, there are finally signs of some serious profit growth. Forecasts of 15% earnings-per-share growth in 2017 are being thrown around, and strategists say at least 10% growth is realistic next year.
The upbeat forecasts for company profits are based on signs that Europe’s economic recovery finally has gained foothold, instilling more confidence in households and encouraging them to spend more. Additionally, companies are starting to invest more and borrow more money to expand sales.
“This [earnings recovery] is typical in what we have described as the ‘growth’ phase of the market, when earnings rather than valuation become the main driver of returns. Hence, we expect the profit outlook to be critical in determining future market returns,” strategists at Goldman Sachs said.
After a bumper 2017 for several assets, traders can easily be forgiven for worrying about financial bubbles and questioning if 2018 can bring any returns at all. But while money managers, by one measure, are the most bearish on stocks since the financial crisis, there’s one region that’s lagged behind this year and but could outperform in 2018: Europe.
In the year-ahead outlooks from the major investment banks, the continent emerges as one of their favorite plays, with four things swinging in the Europeans favor: 1) Earnings are great, 2) the economy is also great, 3) the ECB is still super accommodative, and 4) the worst of the euro strength is in the past.
“The euro area is enjoying a period of robust and above-trend synchronized growth, across both geography and industry,” Citi said in its year-ahead report, forecasting a 17% rally for the Stoxx Europe 600 SXXP, -0.15% next year.
While many investors worry that we are late in the cycle, Citi economists think that we are ‘either later in the recovery phase of the business cycle or early in the boom phase’. They expect a pickup in investment, which is usually facilitated by bank lending
But even with some stellar economic data coming out of the region lately, the Stoxx Europe 600 index SXXP, -0.15% has significantly underperformed other regions in 2017, up 8%. In comparison, the S&P 500 index SPX, -0.08% is on track for a 20% 2017 rally and emerging markets 891800, -0.12% are looking at a 29% gain.
That’s partly because the euro EURUSD, +0.0421% woke from its slumber this year and because Europe is relatively low on tech companies, which have been a key factor in the global rally.
Next year, however, the investment banks largely expect European stocks to race past their U.S. counterparts and perform more in line with emerging markets. Here’s an overview of their forecasts.
| Bank | European stocks | Potential upside* | U.K.’s FTSE 100 | Potential upside* | |
| J.P. Morgan | MSCI Europe: 1,720 | +6% | 7,750 | +2.7% | |
| Morgan Stanley | MSCI Europe: 1,700 | +4.7% | 7,780 | +3.1% | |
| Goldman Sachs | Stoxx 600: 420 | +7.4% | 8,000 | +6% | |
| Citigroup | Stoxx 600: 460 | +17.6% | 8,200 | +8.7% | |
| Deutsche Bank | Stoxx 600: 395 | +1% | 7,500 | -0.6% | |
| Société Générale | Stoxx 600: 385 | -1.5% | 7,000 | -7.2% | |
| UBS | Stoxx 600: 440 | +12.5% | 7,900 | +4.7% | |
| Bank of America | Stoxx 600: 430 | +10% | N/A | N/A | |
| Average | N/A | +7.2% | 7,733 | +2.5% | |
| Compared to Dec. 19’s close | |||||
A 7.2% average forecast may not blow anyone’s socks off in a global 2017 context, but the strategists warn that the stellar returns seen this year are unlikely to be repeated in 2018.
After a long period of stagnation among European companies, there are finally signs of some serious profit growth. Forecasts of 15% earnings-per-share growth in 2017 are being thrown around, and strategists say at least 10% growth is realistic next year.
The upbeat forecasts for company profits are based on signs that Europe’s economic recovery finally has gained foothold, instilling more confidence in households and encouraging them to spend more. Additionally, companies are starting to invest more and borrow more money to expand sales.
“This [earnings recovery] is typical in what we have described as the ‘growth’ phase of the market, when earnings rather than valuation become the main driver of returns. Hence, we expect the profit outlook to be critical in determining future market returns,” strategists at Goldman Sachs said.
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