(Bloomberg) — The rebound in European equities since mid-March has failed to win over strategists, who predict that the sustained campaign of central-bank interest rate hikes will stall the rally.
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They are sticking to their gloomy outlook for the rest of 2023, unconvinced by a 10% advance in the Stoxx Europe 600 so far. The benchmark index is set to fall to 450 points by year-end, according to the average of 15 forecasts in a Bloomberg strategist survey, implying a drop of 4% from Friday’s close.
“Monetary policy has been tightened by the sharpest pace in 40 years, which is resulting in a sharp deterioration of credit and monetary conditions,” Bank of America Corp. strategist Milla Savova said in emailed comments. “We expect this to lead to recessionary growth conditions over the coming months, which, in turn, would be consistent with a meaningful widening in risk premia.”
The BofA strategists expect earnings forecast downgrades to add to the headwinds, cutting their year-end target for the Stoxx 600 to 410 from 430 last month, implying about 13% downside from here. For Savova and her team, the low point for stocks should come early in the fourth quarter, when the economic cycle is expected to bottom, dragging the benchmark to as low as 365.
“We think this will mark the next big buying opportunity for equity investors, as growth momentum starts rebounding in response to a fading drag from aggressive monetary tightening,” Savova said.
European equities have recouped all the losses induced by the banking turmoil in the US and the collapse of Credit Suisse Group AG. The Stoxx 600 surged to the highest since February 2022 this month, buoyed by an economic recovery in China, and rapid intervention by authorities to contain the banking crisis. The trouble is that manufacturing data for the continent have continued to deteriorate, while inflation remains too high for central banks to stop hiking rates.
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The range of predictions for the benchmark index has narrowed, taking on a negative skew. The most optimistic forecast…
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