Goldman, UBS bearish on European stocks

Strategists have been slashing their year-end targets for European stocks, with those at Goldman Sachs Group and UBS Group now expecting the worst year for the region’s equities since 2008.

The Stoxx Europe 600 index will end 2022 at 444 index points, down 9.1% for the year and the worst annual performance since 2018, according to the average of 16 estimates in Bloomberg’s monthly survey. Targets of the more pessimistic strategists indicate the poorest return since the 46% drop during the global financial crisis.

While the 444 point target implies 5% upside from Wednesday’s close, the likelihood of a strong second-half rebound is fading, with strategists slashing estimates by 23 points since last month’s fairly optimistic survey as an energy crisis and concerns around gas flows add to challenges including rate hikes and a looming recession.

“The anticipation of rising headwinds over the coming quarters presents a significant change to the growth-inflation mix,” said UBS strategist Sutanya Chedda, who cut her year-end target for the benchmark by nearly 15% to 410, which implies 16% downside for 2022. “Uncertainty over gas supplies, and the limited flow of Russian gas in particular, is expected to keep energy prices at elevated levels,” she added, expecting economic growth to stagnate in coming quarters.

Goldman Sachs Group strategists also cut their six-month target by 15% in the past month, signalling a 20% decline for the index in 2022. They forecast Stoxx 600 earnings growth of 7% this year, half what bottom-up consensus expects, and cut their 2023 EPS growth forecast to 0% from 5% previously.

European equities have bounced back from an 18-month low reached in early July, but are down 13% this year amid a wall of worries that keeps building up. Elevated commodities prices continue to fuel inflation, which reached a record 8.6% for the euro area in June, prompting the European Central Bank to hike rates by 50 basis points on Thursday.

Fears of recession in the region are mounting, while a Russian gas supply cut-off by year-end is still a possibility even as the resumption of flows through the Nord Stream pipeline offered some relief. The resignation of Italian Prime Minister Mario Draghi is the latest worry for investors, setting the scene for weeks of political uncertainty on the continent.

Peak pessimism

Still, after the Stoxx 600 earlier this month came close to the lowest target in Bloomberg’s survey — a forecast for 380 index points from TFS Derivatives strategist Stephane Ekolo — some are cautiously optimistic that the trough has been reached.

“We would recommend using any weakness as an opportunity to rebuild some positions before the end of the year, as growth and inflation momentum should be more favourable for European equities then,” said Societe Generale strategist Charles de Boissezon. “The next quarter may remain choppy and volatile, but we should not be far from the peak of pessimism,” he said.

Bank of America strategist Milla Savova agrees that the Stoxx 600 has bottomed. “We see no further downside for the Stoxx 600 after the sharp decline since January, which is why we lifted our stance on the market from negative to neutral last month,” said Savova, who reiterated her year-end target of 430 index points.

But among others, the pessimism is still present. Almost half of the participants in Bank of America’s most recent European fund manager survey expect to see more declines for European equities over the coming year, up from about a third in June. Globally, investors are most bearish on the euro-area equities, with allocation to the region’s stocks falling 23 percentage points over the past month to a net 35% underweight, the lowest since June 2012. 

Earnings watch

The earnings season now under way is being closely watched for clues on company prospects, with analysts so far slow to reflect the gloomy economic outlook in their estimates for individual stocks. It’s been a mixed bag so far, with the tech sector seeing big misses from the likes of SAP SE and big beats including Nokia Oyj. Bellwether ASML NV cut guidance, but low expectations meant that the shares held up.

A much bigger adjustment to estimates may be in order, with average price targets for Stoxx 600 components currently suggesting upside of 30% over the next 12 months.

Still, JPMorgan Chase strategists led by Mislav Matejka said that a reset to expectations could be a positive, while a mild recession may mean earnings and margins come down less than during previous downturns. Disappointing corporate results could also help trigger a more benign stance from central banks.

Weaker economic and earnings data “could open the doors for a Federal Reserve pivot by September, and could tempt investors to step in the market, looking for the inflection point,” Matejka said. The strategist has a year-end Stoxx 600 target of 500 index points, implying 18% upside from here.

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