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European stocks face worst year since 2008

Goldman Sachs

Forget about a Santa rally to rescue European stocks from their doldrums, say strategists from Goldman Sachs Group Inc. to Bank of America Corp.

Forecasters slashed targets in the past month, with the average prediction of 406 points in a Bloomberg survey indicating a 17% slide for the Stoxx Europe 600 Index this year, the worst performance since the global financial crisis.

The level signals a less than 2% gain from Thursday’s close, while the poll projects a 1.1% decline for the Euro Stoxx 50 Index in the same period. The likes of Goldman and BofA have cut their outlook in recent weeks, with prospects of a year-end stock rally fading as investors fret about the impact of rising yields on earnings and the political turmoil in the UK.

The Stoxx 600 last month slumped into a bear market, fueled by concerns that soaring inflation and aggressive central-bank policy tightening will fuel a global recession.

“A more friendly momentum on the growth/inflation/policy mix or an investor capitulation will be needed for a genuine bear market trough near term,” Goldman strategists including Cecilia Mariotti wrote last week. Their year-end forecast of 360 is the most bearish among those polled by Bloomberg, implying an almost 10% drop from Thursday’s close.

Back in March, strategists on average expected the Stoxx 600 to close out the year roughly flat versus end-2021. Instead, the benchmark has slid about 20% so far, dragged down by soaring inflation, hawkish central banks, the fallout from the war in Ukraine and the energy crisis.

TFS Derivatives’ Stephane Ekolo, whose forecast in March came closest to the extent of current declines, expects no respite anytime soon.

“The outlook for the European market will be dire for the year-end and most likely for next year,” Ekolo said. “Macro headwinds are nowhere close to abating, geopolitical tensions keep on creeping up, and with the persistent strong inflation, I envision demand destruction that will somewhat be put into evidence by this earnings season and the next.”

European stocks last month hit their lowest level since November 2020, before a timid bounce that’s already losing steam. Many market participants say technical positions may fuel some gains, but fundamentals remain bleak.

Not even a good start to the earnings season has spurred enough optimism to lift the overall market. And BofA strategists warn that the profit outlook may worsen.

“Even after the sharp selloff this year, equities are not yet priced for the continued loss in growth momentum we expect to see over the coming months,” said BofA strategist Milla Savova, who sees the Stoxx 600 closing at 380, near last month’s lows.

Savova expects earnings to slide 20% over the next year, dragged lower by margin pressure and slowing economic growth.

“We think the current resilience of European earnings will prove unsustainable,” she says.

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