• Gloomy forecast for the European stock market
• Rising costs weigh on corporate profits
• Recession not priced in yet
According to CNBC, the market strategists at Goldman Sachs see a “soft landing” for the US stock market this year, while Europe could slip into recession. The experts had already lowered their price targets for European shares massively in the past few months.
On average, analysts expect the Stoxx Europe 600 to fall by 17 percent, which would be the index’s worst performance since the 2008 financial crisis. This corresponds to the current situation, because the index has lost 15.79 percentage points since the beginning of the year (closing price on October 28, 2022). Concerns about inflation and interest rates, the impact of rising yields on earnings and political uncertainties – be it the war in Ukraine or the government crisis in the UK – have caused equity markets to fall. The persistently high level of inflation and the way the central banks are combating it by raising interest rates are also fueling fears of a global recession.
Macroeconomic factors determine the development
Stephane Ekolo of TFS Derivatives therefore paints a gloomy picture for the European market up to the end of the year and beyond. In his opinion, a recovery is not in sight, the analyst emphasized to Bloomberg. “Macroeconomic headwinds are nowhere near abating, geopolitical tensions continue to mount, and with persistently high inflation, I see demand destruction that will be felt in this earnings season and next,” said the market analyst, who said in March gave an accurate assessment of the current market this year.
Bank of America analyst Milla Savova also remains bearish because “even after this year’s sharp sell-off, stocks have yet to price in the continued loss of growth momentum that we expect in the coming months.” As rising costs and slowing economic growth continue to put pressure on corporate profits, the strategist expects profits to fall by 20 percent. The current apparent resilience of earnings in Europe could therefore not last. Milla Savova sees the Stoxx 600 at 380 points (currently 410.76 points, closing price October 25, 2022).
Gloomy prospects for Europe
The good start to the reporting season, which already contained a few positive surprises, provided a short-term upswing, but according to the analysts at Bank of America it could not have a lasting effect, as the profit outlook has deteriorated. Technical positions could provide some gains, but fundamentals remained gloomy.
The difficult macroeconomic situation and the persistent weakness of the euro against the US dollar significantly clouded growth prospects for the “old economy”. The euro area is currently dependent above all on good news in order to bottom out and break away from it. “Better momentum on the mix of growth, inflation and… monetary policy or investor capitulation will be required for a true bear market bottom in the near future,” Goldman Sachs strategist Cecilia Mariotti quoted Bloomberg as saying.
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