Goldman strategists see Europe stocks rising as economy improves

BLOOMBERG

European stocks will rise next year as household spending power picks up and the threat of a sharp slowdown eases, according to Goldman Sachs Group Inc strategists. Quicker-than-expected cooling in euro area inflation should lead to positive growth in real wages — a boost for consumers, while also reducing obstacles to interest-rate cuts and with that the risk of a deep recession, the team led by Sharon Bell wrote in a note. “We expect European equities to continue to perform in 2024,” the strategists said. “This is predicated on an improved economic backdrop, reasonable valuation and a roughly flat outlook for long-term bond yields.”
The strategists see the benchmark Stoxx Europe 600 advancing to the 480 level over 12 months. That’s upside of about 7%, but still short of the January 2022 peak. The index has gained this year as investors anticipate the end of central bank tightening and economies avoid a serious downturn.
Bell’s team regards European equity valuations as “undemanding,” maintaining a wide discount to US peers that the strategists expect to persist. “We think the gap reflects weaker European economic growth and a higher risk premium for European shares. But, nonetheless, the valuation gap does suggest concerns about Europe are already well-priced.”
The strategists are doubtful that inflows to European stocks will resume sharply after two years of outflows, especially given the attractive yields now available on other assets.
“We think the main buyer of Europe will continue to be itself via buybacks,” they wrote. “There is also scope for M&A to pick up, assuming rates stabilise and recession risk continues to fade.”