Goldman, Citi See Europe’s Economic Edge Extending Stock Rally

n6)k6zqdtf5)3fef4p4[1277_media_dl_1.png Citigroup

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(Bloomberg) — The perils of trade and geopolitics will only slow the rally in European stocks rather than derail it, according to Wall Street strategists.

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The Stoxx Europe 600 Index is expected to end the year around 557 points, according to the average of 19 strategists polled by Bloomberg. That implies a further 3% advance from Wednesday’s close, handing investors annual returns of about 10%. 

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Europe’s loosening monetary policy and increased government spending are forecast to give the region’s stocks the impetus they need to overcome risks from tariffs and rising international tensions.  

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“Equity markets have been remarkably resilient, despite many risks,” said Citigroup Inc. strategist Beata Manthey. She noted that global equity market valuations reflected relatively average levels of geo-economic risk in the lead up to the Israel-Iran conflict. “This could be worrisome from a short-term perspective, but over the longer term we see many structural tailwinds to support European equities.”

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European stocks have posted moderate moves since mid-May, following a V-shaped recovery that erased all the losses triggered by the US tariff announcements of early April. Recent weeks have proved more volatile, as Middle East tensions intensified and pushed oil prices higher. The Stoxx Europe 600 is down 1.5% this month, with energy shares and utilities the only sectors in the green. 

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“Many investors we are speaking with are awaiting the end of the truce on US tariffs on July 9 to gain better visibility,” said Societe Generale SA strategist Roland Kaloyan. “Looking ahead, we anticipate that the European equity market will remain within a trading range.”

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Most strategists have had to chase the rally in Europe as the outlook brightened, updating the cautious price targets they drew up in January. Challenges to so-called US exceptionalism in stocks, Europe’s improving economic prospects, as well as a wide interest-rate differential have fueled bets on the region.

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The positive sentiment is also evident among investors. The Bank of America Corp. fund manager survey conducted this month before Middle East tensions escalated showed that a net 34% of European investors expect stocks in the region to rise in the coming months. While that’s broadly unchanged from May, the net proportion expecting gains in the coming 12 months has rebounded to the February high of 75%.

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On a relative basis, asset allocators are increasingly bullish on Europe. A net 34% of portfolio managers in the BofA survey said they are overweight European equities against their funds’ benchmark levels — close to a four-year high. A net 36% said they are underweight US equities, nearly the most in two years. 

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While investors haven’t lost sight of the risks posed by trade tariffs, they are growing more optimistic about the economy, which will feed into corporate profits, the survey showed.