JPMorgan Private Bank's Madison Faller suggests investors should become more selective regarding European stocks as improving earnings are increasingly reflected in valuations. While European equity earnings have improved over the past few quarters, Faller noted that valuations have caught up, necessitating a more focused approach within Europe. This sentiment comes as European stock markets are experiencing a significant rally, drawing attention from money managers who believe this uptrend will be more sustainable than previous short-term movements. Metrics across earnings, economic growth, sentiment surveys, and fund flows indicate a major shift in European stocks, with the Stoxx Europe 600 Index showing consistent gains.
Goldman Sachs has raised its 12-month target for Europe’s STOXX 600 index, increasing it to 695 points from a previous forecast of 660. This implies an upside of approximately 5.5% from current levels. The brokerage cited strong corporate earnings and resilient economies as the primary reasons for this upgraded outlook. Europe is on track for one of its strongest earnings seasons in years, with soaring energy and materials profits offsetting softer demand in other sectors. Goldman Sachs also highlighted that European equities remain cheaper than their US counterparts and offer relatively high shareholder returns through dividends and share buy-back programs.
Companies in the STOXX 600 are anticipated to report aggregate earnings growth of 23.4%, based on data from LSEG I/B/E/S. Despite concerns about energy supply, the index has advanced 11.3% year-to-date, compared to a 13.9% increase in the S&P 500. Goldman Sachs did flag a prolonged energy shock as a major risk for Europe due to its dependence on imported energy, which has kept investor risk appetite in check. Furthermore, JPMorgan's quantitative strategists, led by Khuram Chaudhry, identified Europe as the top region for corporate earnings upgrades, noting a fast-improving situation in Europe compared to the US and Japan.
Europe Inc. is delivering one of its strongest earnings scorecards in years, positioning regional stocks for new highs. MSCI Europe profits have surged 14%, with over half of the index's constituents surpassing earnings estimates for the second quarter. Both these figures represent the highest levels since early 2023, according to Bloomberg Intelligence data. Goldman Sachs also raised its 12-month target for Britain’s FTSE 100 to 11,400, representing an upside of about 5.8% from current levels.
