European wealth managers are cooling on their home market. Out of 22 firms Bloomberg asked, just seven are overweight Europe, with most sitting on the fence and four underweight. That is a retreat from early in the year, when 10 respondents were upbeat on the region and only one was negative.
Not everyone is throwing in the towel. In mid-July, UBS Global Wealth Management upgraded its stance on European stocks to attractive from neutral, and simultaneously forecast nearly 25% earnings growth across the coming two years.
The Stoxx Europe 600 has notched five monthly gains in a row and returned 13% so far in 2024. On price tags, the index is around 14.8 times forward earnings, above its own 20-year norm of 13.4. For comparison, the S&P 500 sits at 19.5 times.
Forecasts lean America's way. Bloomberg Intelligence data show analysts anticipate Stoxx 600 company profits will increase 15% this year, while estimates for the S&P 500 point to a 27% jump. Upgrades to European earnings have been coming through, with the current run the longest since 2022, but some managers argue the second quarter leaned heavily on financials and energy and needs to broaden out.
"Following such a pronounced rally, future returns are likely to depend more on earnings growth than expanding valuations," said Quintet Private Bank's head of investment and chief strategist, Daniele Antonucci. He added that this makes upside "somewhat less compelling."
Plenty of the good news looks baked in, and the macro crosswinds are stiffening. Long-dated Treasury yields pushed near 20-year highs in mid-August, refocusing attention on bond risk.
Currency and politics complicate things further. A firmer euro can pinch Europe's exporters, and next year's presidential contest is already casting a shadow over French equities. Abroad, the Strait of Hormuz remains a flashpoint.
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Oil and gas prices have eased from this year's highs, but exposure to shocks is still a worry. "The region remains highly exposed to geopolitical risks," noted Philipp Lisibach - LGT Private Banking's chief investment officer for Europe - adding that energy prices remain elevated.
An improvement in Middle East energy tensions could flip the narrative. "If we find a solution to the energy issue in the Middle East, that could be rather positive for sectors like industrials for example, maybe even the consumer sector, which in Europe didn't do so well this year," Nolting said.
Caution is pushing investors to be choosier across countries, sectors and names. BNP Paribas Wealth Management is leaning harder into value areas such as banks. "This reflects our call to diversify out of tech-led growth into value segments, regions and sectors," said Edmund Shing, the firm's global chief investment officer.
A weaker dollar tilts the field toward developing economies while putting pressure on European exporters that rely on foreign demand. "When the dollar weakens, it is really emerging markets that is a better place to allocate money," said Indosuez Wealth Management's chief market strategist, Jerome van der Bruggen.
There are reasons for optimism too. Europe's pivot to fiscal support, headlined by Germany's €500 billion spending plan, has some turning more positive.
The backdrop boils down to this: Europe is cheaper than the US but not relative to its own history, earnings momentum still trails the S&P 500, and the macro setup is noisy. That is why some, like Barclays Private Bank's Julien Lafargue, say, "Our inclination would be to reduce exposure in the coming weeks, as we think Europe is likely to disappoint economically and expect investors to take profits rather than commit more capital to the region."
Others are staying in, but with a tighter focus on value, country mix and energy sensitivity. If European stocks you own deliver the earnings, the market has room to reward that. If not, the bar on valuations is already a little higher, and the path of yields, the euro and geopolitics will do more of the talking.
