Outperforming growth stocks: Goldman Sachs strategists expect comeback for European value stocks

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• European equities cheaper than US equities – but vulnerable to further declines
• Market overly pessimistic about growth prospects for a number of value sectors
• European value stocks are outperforming growth stocks

Goldman Sachs strategist Sharon Bell explained in an interview with Bloomberg in mid-September that European stocks are currently looking cheaper than US stocks. At the same time, she also warned that these are still vulnerable to further declines.

Comeback for European banking and energy stocks

However, according to an analysis by Sharon Bell’s Goldman Sachs strategy team, European banking and energy stocks could soon celebrate a comeback. Experts say banks could benefit from higher interest rates and strong balance sheets, while energy shortages and a trend toward green spending could support energy stocks. “All in all, we think the market is overly pessimistic about the growth prospects for a number of value sectors,” said Institutional Money of Goldman Sachs strategists. This is particularly the case with banking, energy and commodity stocks. These would be traded at “heavy discounts” to their US counterparts.

Value stocks cheaper than they have been in ten years

European value stocks are outperforming European growth stocks for the first time since 2016, Institutional Money reports. According to Goldman Sachs, companies in the value sector have achieved stronger profits than, for example, companies in the consumer staples sector, to which investors have fled due to interest rate concerns and recession risks. Nevertheless, the value stocks, measured by the relative valuation, are cheaper than they have been for ten years. According to Goldman Sachs economists, they are trading at price-to-earnings multiples in the mid-single digits, which is a low relative to both the market and their own past performance. “The paradox is, the more they earn, the more investors see this as unsustainable, leading to an even deeper discount,” Institutional Money quoted the strategists as saying.

Some prerequisites for continued outperformance evident

According to the Goldman Sachs strategists, not all the conditions for continued outperformance of value stocks this year have been met, but some are discernible.
As Institutional Money reports, the strategists assume that inflation will peak in late autumn and that uncertainty will increase monetary policy so should gradually decrease.

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