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Goldman, BofA say European stocks rally in 2023 is mostly done



This year’s extension of the powerful European equities rally leaves limited room for more gains, according to strategists.
After making its best ever start to a year, the Stoxx 600 Index will end 2023 at 452 points, according an average response in the Bloomberg survey of 19 market forecasters, implying a 1.2% drop. That’s even after several investment banks raised their view since last month’s poll,
including those at Goldman Sachs Group and Barclays Plc.
“Even though we have raised our price targets, we still expect only weak returns,” said Goldman equity strategist Sharon Bell, who this month increased her forecast to 465 points from 450. With risks for stocks still high, and earnings set to weaken further, bonds and cash are clear alternatives, she said.
European equities have performed strongly in January, with the Stoxx 600 climbing about 7% and taking returns to nearly 19% since the low of September 29, 2022, beating the US by 11 percentage points in local currencies. Cyclical stocks including retail, travel, banks and technology have led the rally, spurred by faster-than-expected reopening in China, the avoidance of a deeper energy crisis, and signs that inflation is slowing. Additionally, the economy has been holding up better than expected, with fewer economists now forecasting a recession, implying earnings may fall by less than first feared.
For BofA strategist Milla Savova, the rally in Europe has defied contracting business activity in Europe and the US, both of which are running at recessionary levels. Should economies weaken in line with BofA’s projections, Savova sees the Stoxx 600 falling about 20% to 365 by mid-year. Yet she expects a rebound in growth to fuel a bounce to 430 by year-end.
According to January’s BofA European fund managers’ survey, the majority think the market hasn’t troughed yet, with 73% of respondents expecting a new low in response to monetary tightening and slowing growth.
Only 5% see more upside from China reopening and a fading drag from the energy crisis.
The picture is brighter in the longer term, with 70% of survey respondents seeing upside for European equities over the coming 12 months, up from 58% last month. More broadly, allocations to the region have been rising, with 4% of global investors overweight, compared with a 10% underweight in December. That’s the highest reading since February 2022.
UBS Group AG strategist Gerry Fowler has a year-end target of 410 for the Stoxx 600, implying about 10% downside from current levels based on expectations for falling earnings. Yet he sees some light at the end of the tunnel.
“We think valuations are already at the right level, but there could be upside risk if investors continue to allocate away from the US as economic growth leadership transitions to the rest of the world,” Fowler said.

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