Strategists Cautious on European Stocks Amid Political Uncertainty

Strategists Cautious on European Stocks Amid Political Uncertainty 

European stocks are expected to show limited growth potential, according to strategists who are taking a cautious approach due to upcoming elections in France that could significantly impact economic policy.

The Stoxx Europe 600 is predicted to end the year at 517 points, close to its recent closing level, based on an average of estimates from 16 strategists. After an approximate 8% rise this year, there's hesitancy in forecasting further gains for the second half, given the political uncertainty in France, potential power shifts in the UK, and the contentious US election focused on trade issues.

This average prediction has slightly increased from last month's forecast of 503 points. Some strategists, including those from Pictet and UniCredit, have raised their targets due to attractive valuations, improved economic outlooks in the region, and better earnings forecasts. A significant upward revision from UBS's Gerry Fowler has also contributed to raising the median forecast to 533 points.

"While European equities are fundamentally strong, they remain highly sensitive to economic and policy risks," say Goldman Sachs strategists, including Lilia Peytavin, predicting the Stoxx 600 will reach 530 points by year-end.

Goldman strategists do not anticipate European stocks outperforming US stocks, as Europe is less likely to benefit from AI-driven growth and is more vulnerable to international trade and policy uncertainties. They note the risk of additional tariffs post-US election and believe the European equity risk premium may persist until a new French government is in place.

The regional benchmark saw its biggest weekly drop since October after French President Emmanuel Macron called a snap legislative election, raising fears of political gridlock and increasing the risk premium on French bonds. This came at a challenging time, as France's sovereign debt rating was recently downgraded by S&P Global.

Despite short-term instability affecting sentiment, especially towards French stocks, analysts remain optimistic about European equities, with the Bank of America's recent survey indicating broad bullishness. Although the percentage of respondents expecting near-term gains dropped to a net 52% from 63% last month, a net 67% still anticipate gains over the next year. Globally, a net 30% are overweight on European equities, the highest since February 2022.

However, BofA strategists, among the more bearish in the survey, believe the consensus is overly optimistic about the broader economy and European stocks. They argue that a slowdown in US consumer spending, rather than political issues, will end the rally, outweighing any benefits from falling interest rates.

"Our macro projections suggest a typical slowdown, where weakening growth momentum driven by declining US consumption increases equity risk premiums and lowers earnings expectations," say strategists led by Sebastian Raedler. They predict the Stoxx 600 will drop to 460 points, implying an 11% decline.

Short-term risks have also made bullish strategists cautious, with Citi's Beata Manthey recently downgrading continental Europe to neutral, favoring the US instead. "We remain optimistic over the medium term due to early-cycle macro dynamics in Europe and improving fundamentals," she says.