European Stocks May Have All the Downward News Already Priced In
With all the noise about European stocks facing a challenging year ahead, it’s worth asking whether that pessimism is now fully priced in.
The challenges are clear: fears of stagnation, political uncertainty and trade risks have caused European equities to underperform in the final quarter of 2024, down more than 3% during what is usually a seasonally strong period. But against the backdrop of an aggressive Fed shift and volatile valuations in the US market, European stocks are starting to look increasingly attractive.
The earnings yield spread between the Stoxx 600 and the S&P 500 currently stands at just over 3 percentage points, well above the 10-year average of 1.4, highlighting the relative value that Europe offers. While US equities struggle with a strong dollar and rising bond yields, European stocks present a compelling case for traders willing to consider the region’s discounted valuations.
Moreover, the probability of a euro-area recession (as measured by a Bloomberg survey) has held steady at around 30% since July, suggesting that the economic backdrop is not crumbling too quickly. If sentiment begins to change and traders shift to the camp that Europe’s downturn is largely priced in, the year-end gloom could give way to a new-year rally, capitalizing on Europe’s superior valuations and lower expectations.
Source: Bloomberg
