Citigroup strategists in a recent research note heightened their growing optimism about European equities, which posted their best-ever quarterly performance in the fourth quarter of last year, versus its US counterpart following years of declines.
The bank’s expert team recommended the research note to increase the relative weight of European equities in investment portfolios, noting that current valuations already reflect expectations of a 15% drop in earnings. Citigroup strategists wrote in the research note that the US is “close to recession. They expected its stock market growth to be weaker in the first half, then strengthen in the second half.
They expected the Standard & Poor’s 500 to end the year at 4,000 points, up 5% from current levels, while the Stoxx 600 is expected to rise 8%, to 475 points.
They pointed out that due to the currently looming recession in the US, most investors are turning away from the shares of major American companies, focusing more on their lower cost European counterpart. They pointed out that the Stoxx 600 index trades at a profitability multiple of 12.2 times when calculating expected earnings, compared to the Standard & Poor’s 50 index which trades at 16.6 times.
The bank’s strategic experts had expected corporate profits globally to fall 5-10% this year, contrary to current analyst expectations of growth of around 3%, according to the note.
Analysts have already started to revise their expectations of an increase in the number of buy/sell recommendations, for both stocks in Europe and the US.
With major US banks including JPMorgan and Bank of America opening earnings season next week, investors can weigh the impact of rising interest rates, high inflation and slowing demand for corporate earnings .
Bank experts had expected interest rates to peak in the first half of 2023 and the possibility of starting to reduce them by the end of the year. The research note pointed out that peak interest limits the damage from rising stock market valuations.
These recommendations go in the direction of Citigroup experts to anticipate a decline in the global market and take into account factors such as the equity risk premium, cash flows and the growth rate of capital spending, revealing 6.5 out of 18 potential warning indicators and recommend buying on declines and not chasing elevations, according to the research note.
Goldman Sachs strategist team raised the 12-month target level for the Stoxx 600 index to 465 points, up 5.8% from Thursday’s close.
Their Societe Generale colleagues, including Roland Kaloyan, said European equities, despite what appear to be higher bond prices, will attract buyers if the European index approaches 400 points.
