European investors ‘too ebullient’

Mass protests over pension changes in France, rising interest rates, continued war in Ukraine – the headlines across Europe may be grim, but investors in European stocks are in fine form, with indices continuing to march higher.

In France, investors have shrugged off mass protests against president Macron’s pension changes, with the CAC 40 index touching record highs. Germany’s Dax index has hit fresh 52-week highs, reaching its highest level since January 2022, before Russia’s invasion of Ukraine. Indices in the UK, Italy and Spain are all near 52-week highs, while the pan-European Euro Stoxx 50 is approaching November 2021′s post-financial crisis high.

Europe has been outperforming the US for some time now, with the large-cap Stoxx 600 index beating the S&P 500 for four consecutive quarters – its longest period of outperformance since 2008.

Many strategists see this trend continuing over the next decade. Europe badly underperformed the US between 2008 and 2022; the yawning valuation gap that developed over that period may have narrowed recently, say bulls, but it remains wide.

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Still, not everyone is convinced the recent uptrend can continue. A recent BCA Research note posited that European stock markets are “at risk”. Why? Tightening global credit conditions suggest global growth will be “soft” in coming months, threatening “highly cyclical European stocks”. Secondly, unlike in the US, European earnings expectations have not yet declined, which brings “real danger” for indices near record highs. Thirdly, options data shows investors are buying little protection. This “complacency” looks “increasingly dangerous” and leaves Europe exposed to any global growth disappointment.

BCA’s take: “European equities are too ebullient.”