The European stock market’s rally to record highs has caught many strategists by surprise, leaving them racing to catch up and cautious on further gains.
The Stoxx Europe 600 Index has surged nearly 9% this year, breaking new ground this week above 550 points. That’s outstripped the average end-year target of 540 points in a Bloomberg survey of strategists published Friday — even though this is higher than the level seen in the survey last month. Investors have been moving faster, as they diversify out of US assets and bet on a ceasefire in Ukraine.
“European equities have started the year with a bang,” said Citigroup Inc. strategist Beata Manthey. “Our once bullish forecast for the Stoxx 600 has only 3% upside left. It is possible to envision upside catalysts for Europe going forward, but tariff-related newsflow could reinflect volatility.”
While the average target in the survey has increased versus 534 last month, it suggests nearly two thirds of strategists now see downside ahead. The range of forecasts has narrowed slightly, though views remain widely spread. Deutsche Bank AG is the most optimistic at 590 points, implying 7% upside. Meanwhile TFS Derivatives Ltd sees the benchmark dropping 11% to 490, the lowest in the poll.
Analysts have been forced to respond as European stocks have been on a roll since the start of the year, outperforming the US. On the macro front, the economy is expected to recover, borrowing costs are coming down, and Germany’s election on Sunday has raised expectations for fiscal stimulus. Talks over a ceasefire in Ukraine have also lifted the mood. Optimism about earnings, buybacks and upgrades are adding momentum.
The fourth-quarter earnings season has also been beating estimates. That’s taken year-on-year growth in earnings to 1%, compared to a 1.3% decline expected pre-season, according to a Bloomberg Intelligence tracker. Analysts have been busy raising their view on the region’s profits, with a Citigroup gauge of revisions in positive territory since the start of the year.
For global investors, the tide has turned in Europe. Bank of America Corp.’s latest fund manager survey showed long positions on the continent have reached an eight-month high, while the Euro Stoxx benchmark is expected to be the best performing index this year by a plurality of investors. Allocation to euro-zone equities has risen 36 percentage points in two months to reach a net 12% overweight, the highest since June, the survey showed.
