Wall Street strategists are recommending European equities over their US peers as an improving economic outlook and near-record discounts drive gains beyond the technology industry.
Market forecasters at Goldman Sachs Group Inc. and Citigroup Inc. say companies that are sensitive to the economy’s ebb and flow — so-called cyclical stocks — will lead the next leg. That bodes well for Europe, where cyclicals dominate benchmark indexes more than in the US, and data point to economic green shoots.
It also marks a potential shift from the frenzy around artificial intelligence that defined equities’ performance in the first quarter.
“We see Europe benefiting from a pick-up in global PMIs and in particular an upswing in the manufacturing cycle as well as rate cuts from June,” Goldman strategist Sharon Bell wrote in a note. She predicted the Stoxx Europe 600 Index will outperform the S&P 500 Index over the next 12 months and flagged small-caps stocks, where discounts are especially wide.
The trend was already visible last month, when Europe’s Stoxx 600 narrowly beat the S&P 500 as the tech rally stirred memories of the dot-com bubble a quarter century ago. Hedge funds and mutual funds are boosting exposure to European equities, while short positioning has been drastically reduced.
“Relatively cheap cyclical exposure keeps Europe well positioned for further market broadening and potential stimulus out of China,” Citigroup’s Beata Manthey wrote. She retained her preference for European stocks relative to the US, while upgrading Japanese equities to overweight and cutting her view on emerging-market stocks to neutral.
In the US too, there are signs the rally is spreading into sectors beyond tech.
Economic data and the leading performance of the nation’s shares are flagging a so-called no-landing scenario, in which the economy continues to expand and inflation remains stickier than expected, Morgan Stanley strategist Michael Wilson wrote in a note.
Copyright Bloomberg News
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