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Our views 30 January 2024

ClockWise: European stocks get their day in the sun but how bright is the future for the region?

5 min read

Stock markets recorded further gains last week, leaving the S&P 500 at new all-time highs and marking the index’s 12th weekly advance in the last 13. However, it was European stocks which received the most attention, with the STOXX Europe 600 having its best weekly performance since early November.

A couple of factors have helped drive this resurgence in European equities. First, markets took away a more dovish message from the European Central Bank (ECB) meeting last week. While the ECB kept interest rates unchanged, President Christine Lagarde pointed to the importance of data that they will have available in coming months and didn’t appear to push back strongly on market pricing of earlier cuts. This theme of markets pricing in earlier rate cuts has helped to lift stock prices not just in Europe, but globally this year so far.

More importantly, stronger than expected earnings were the key to last week’s impressive European performance. LVMH (+17%), ASML (+16%) and SAP (+7.5%) were among the companies which saw a strong weekly performance following earnings announcements.

At the broader level however, we are not seeing the underlying earnings in the region as much of a positive. Despite the positive earnings of the tech and discretionary sector, we have observed a broader relative weakening of European earnings; more analysts are downgrading their forecasts than upgrading (Chart 1). Therefore, although a few high-profile earning beats seem to be driving market optimism right now, we maintain a negative view on the European equity region and prefer regions such as Japan, where the earnings trend looks broader and more established.

Chart 1: Regional relative earning revisions score

Chart shows earnings revision factor between March 2022 to January 2024, comparing US, UK, Europe, Japan, Pacific and Emerging markets

Source: Royal London Asset Management as at 29/01/2024


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.