Strategists ditch optimism for European stocks on trade war risk
A MONTH after chasing the market with multiple upgrades for European stocks, strategists are back to cutting their targets, spooked by volatility and trade tensions.
About a third of the 17 strategists in a monthly Bloomberg survey lowered their year-end targets in April. While the average estimate still sees the Stoxx Europe 600 Index rising to 546 points by end-year, professionals are turning cautious given the twists and turns of US policy.
European stocks have held up relatively well this year, with the continent’s benchmark index up 2 per cent for the year, a sharp contrast with the S&P 500’s 9 per cent drop. Still, effective US duties are the highest in a century, which is likely to negatively impact growth.
“Our tariff modelling suggests most of the impact in Europe is in net exports and not the consumption or other categories,” said UBS Group strategist Gerry Fowler. He sees the Stoxx 600 ending the year at 550 points, down from 580 a month ago, a forecast which assumes “some moderation in China tariffs”.
Expectations for resilient earnings are preventing an even deeper cut, Fowler noted. This is helped by fiscal stimulus, which should fuel a cyclical acceleration in 2026-2027, he added.
Despite tariff uncertainty, the European market is indeed benefiting from an expansive fiscal policy, led by Germany, and much lower interest rates than in the US. The European Central Bank is expected to cut its benchmark as much as three times by the end of the year, taking the base rate close to 1.5 per cent and keeping a two-percentage point differential with the Federal Reserve.
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“Trading conditions could remain choppy amid still-elevated macro/policy uncertainty,” said Citigroup strategists led by Beata Manthey. “However, should trade negotiations continue successfully, we still see scope for 5-10 per cent upside for European equities by year-end.”
Barclays strategists led by Emmanuel Cau made the deepest cut, slashing their Stoxx 600 target to 490 from 580 a month ago. Yet, they insisted that the range of outcome is wide, with potential to fall to 390 in the event of a prolonged recession, or rebound towards 530 if the trade war de-escalates quickly.
On a relative basis, they added that Europe is in a better position given supportive monetary and fiscal policy. “Big picture, the end of US exceptionalism could well be Europe’s chance,” they said.
With the recent volatility spike, caution has returned and market bears are seeing the current narrative likely to prove them right. TFS Derivatives strategist Stephane Ekolo, who already had the survey’s lowest target, cut his view even further. He sees a 9 per cent downside this year, with the Stoxx 600 falling to 470.
“Investors still fail to appreciate the economic growth slowdown and weakening corporate environment ahead,” Ekolo said. “Deteriorating PMI, weak earnings, negative EPS (earnings per share) revisions are likely to take their toll on the market, adding downside risks.”
Investors are still bullish but the excitement about Europe is cooling, according to the latest fund manager survey by Bank of America. A net 19 per cent of respondents expect near-term gains for European equities, down from 30 per cent last month, while a net 56 per cent project upside in the next 12 months, down from 67 per cent.
Overall, a net 22 per cent say they are overweight European equities, down from 39 per cent last month. By contrast, a net 36 per cent say that they are underweight US equities, the highest in almost two years.
“In the short term, volatility may persist and corporate guidance could remain unclear,” said Societe Generale strategist Roland Kaloyan, who sees little upside from current levels. “Trade negotiations are still underway, central banks retain policy firepower and markets have yet to price in the anticipated tax cuts in the US, as well as potential supportive measures from countries with fiscal room to mitigate the impact of the tariffs.”
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