Wall Street Investment Banks: European Stocks Expected to Outperform U.S. Stocks This Year
Many Wall Street strategists believe that with the improvement of the economic outlook in Europe, European stocks will enjoy their best annual performance relative to U.S. stocks in 20 years.
According to the average forecast of 20 strategists, the Stoxx Europe 600 Index is expected to rise to around 554 points this year. As of Monday's (May 19th) close, the Stoxx 600 Index closed at 549 points, meaning it is projected to rise by approximately 1% for the rest of the year. Notably, the index has already gained over 8% since the start of the year.
In contrast, strategists are far less optimistic about the U.S. market. Another media survey found that strategists on average predict the S&P 500 Index will close at 6,001 points this year, roughly flat with Monday's closing price, while the index has only risen 1.6% year-to-date.
Among them, JPMorgan Chase has set a target of 580 points for the Stoxx 600 Index, one of the highest in the survey; Citigroup expects the index to rise 4% to 570 points this year as analysts' pessimism about corporate earnings eases. Both banks expect the U.S. benchmark stock index to decline for the remainder of the year.
"When it comes to European stocks," said Beata Manthey, a strategist at Citi, "we have moved past earnings uncertainty, which could lay the foundation for further gains and potential re-rating, especially in hard-hit cyclical sectors."
Shift in European Stock Forecasts
This forecast also marks a turnaround from early-year expectations, when strategists predicted European stocks would significantly lag behind U.S. equities.
But as Germany's historic fiscal reforms and strong corporate performance attract investors seeking alternatives to U.S. assets, views on European benchmark indices have rebounded.
A Bank of America survey released a week ago showed that 35% of global fund managers are currently overweight European stocks, while net exposure to U.S. stocks has fallen to a two-year low.
Compiled data shows that earnings of MSCI European constituents grew 5.3% in the first quarter, far exceeding analysts' forecast of a 1.5% decline.
Some Divergences
To be sure, the Stoxx 600 Index's more than 8% year-to-date gain has also raised concerns about its valuation. The benchmark currently trades at a price-to-earnings ratio of about 14.6 times, higher than the 20-year median of 13.5 times, though still lower than the S&P 500's nearly 22 times.
Of course, some investment bank strategists in the survey remain hesitant on the outlook for European stocks. For example, Roland Kaloyan, strategist at Societe Generale, said he needs to see stronger earnings trends and further reduction in tariff-related risks before betting on continued gains in the Stoxx 600. His year-end target is 530 points, implying a 3.5% decline from Monday's close.
"Uncertainty surrounding tariffs further complicates the outlook, as many companies are reluctant to provide clear guidance, suggesting the full impact of these tariffs may not yet be reflected in earnings forecasts," Kaloyan said.
Gerry Fowler, strategist at UBS Group, said that while valuations have risen as expected due to stronger projected economic growth over the next two years, "to see further gains, we must navigate a period of uncertainty, which could keep earnings per share growth at or slightly below zero this year."