(Bloomberg) — Bulls are rushing into European stocks, creating near-term risks after a strong fourth-quarter rally, according to Citigroup Inc. strategists.
Most read on Bloomberg
The Stoxx Europe 600 index jumped more than 10% in the last two months of 2023, boosted by expectations of central bank policy easing and the surprising resilience of the region’s economies. The first trading days of the new year have already shown a more cautious tone as bond yields have risen and traders have limited their bets on interest rate cuts.
“Stock market volatility tends to increase when central bank easing begins and market positioning is now the most bullish since 2019, implying potential short-term vulnerabilities,” wrote a team led by Beata Manthey in a note.
Focus will soon turn to fourth-quarter earnings season, with Manthey saying earnings delivery could be particularly crucial this year after traders priced in more aggressive rate cuts. Earnings per share growth in Europe will need to exceed pessimistic market expectations, she said.
Manthey, who has been optimistic about Europe for most of 2023 as stocks have rebounded, remains positive about the outlook and expects the benchmark Stoxx 600 to climb to a record high of 510 by the end of this year. She notes that European stocks are generally higher 12 months after the start of the European Central Bank and Federal Reserve’s easing cycles.
Manthey tied with Deutsche Bank AG strategists for the highest forecast of the Stoxx 600 2024 in a survey conducted by Bloomberg in December last year.
That said, she doesn’t rush to follow stocks higher, but will wait to buy into any weakness. “We would buy dips, as our bear market checklist advises, without chasing rallies.”
Most read from Bloomberg Businessweek
©2024 Bloomberg LP
