Citi strategists see near-term risk in European stocks

Bulls have been piling in but earnings season will be crucial.

Bulls are piling into European stocks, creating near-term risks after a strong rally in the fourth quarter, according to Citigroup Inc. strategists.

The Stoxx Europe 600 jumped more than 10% in the final two months of 2023, boosted by expectations of central bank policy easing and surprising resilience in the region’s economies. The first trading days of the new year have already displayed a more cautious tone as bond yields rose with traders reining in their bets on interest-rate cuts.

“Equity market volatility tends to rise when central bank easing begins and markets positioning is now the most bullish since 2019, implying potential near-term vulnerabilities,” a team led by Beata Manthey wrote in a note.

The focus will soon shift to the fourth-quarter reporting season, with Manthey saying earnings delivery could be particularly crucial this year after traders priced in more aggressive rate reductions. European earnings-per-share growth will need to exceed downbeat market expectations, she said.

Manthey, who was optimistic on Europe for most of 2023 as stocks rallied, remains positive on the outlook and expects the benchmark Stoxx 600 to climb to a record high of 510 by the end of this year. She notes that European equities are usually higher 12 months after the start of European Central Bank and Federal Reserve easing cycles.

Manthey was tied with Deutsche Bank AG strategists for the highest 2024 Stoxx 600 forecast in a survey conducted by Bloomberg in December last year.

That said, she’s not rushing to follow stocks higher but will wait to buy into any weakness. “We would buy dips, as advised by our Bear Market Checklist, while not chasing rallies.”