LONDON/MILAN: A rebound in corporate profits is expected to send European stocks to record highs by the end of 2021, a year during which massive fiscal and monetary stimulus and COVID-19 vaccines will back the recovery of the continent’s economy.
A Reuters poll of 24 fund managers, strategists and brokers surveyed over the past two weeks foresaw the pan-European STOXX 600 index reclaiming levels last seen before the 2020 pandemic market crash and climbing to 440 points by year’s end.
Based on Tuesday’s close of 411.32 points, that would represent a 7% gain for the benchmark which, unlike its Wall Street peers, has struggled to keep up with the rally in global equity markets.
While the MSCI’s global stock index has been regularly reaching records since August, European stocks have failed to return to February 2020 highs.
European economies are reopening only gradually, largely because of the slow roll-out of vaccines, but the poll’s forecast for the end of 2021 is 10 points higher than it was in November.
A gradual improvement in corporate profits is expected to help push European shares back up to pre-COVID 19 levels and then scale new highs.
The fourth-quarter earnings season has been promising so far. Some 68% of results beat estimates, according to Refinitiv I/B/E/S data.
Over the last month, analysts have revised their fourth-quarter profit forecasts for companies listed on the STOXX 600 to a decline 16.5% year-on-year from more than 23%.
“We expect earnings dynamics to continue positively”, said Philipp Lisibach, chief global strategist at Credit Suisse in Zurich. “The vaccine rollout over the course of 2021 will allow business activity to normalize also in sectors that are most severely affected.”
From 2021, European companies are expected to rebound, with profits jumping 38.4% in the first quarter and 78.1% in the second.
Others worry that markets have been overly optimistic in pricing the recovery.
With a target of 400 points for the end of 2021, Ekolo doesn’t see any upside for the STOXX 600 this year.
Other factors that could affect equity markets are a sudden burst of inflation lifting yields on risk-free government bonds and making stocks less attractive, Ekolo added.
Bank of America Global Research has warned an inflation surprise would put the upside for European stocks at risk.
Fears central banks might need to tighten their accommodative policies or even just signal their intention of doing so could lead to a burst of volatility.
Going forward, equity portfolio managers will need to balance between stocks that typically benefit from rising rates, growth and inflation, like banks, and those, like tech, that have prospered in a low-growth, low-interest-rate environment. According to the poll, the UK’s top FTSE 100 share index was expected to reach 7,025 points by the end of 2021, up 6.0% from Tuesday’s close. France’s CAC 40 was expected to gain 4.1% to 6,019 points, Italy’s FTSE MIB to rise 7.0% to 24,550 points and Spain’s IBEX to rise 4.8% to 8,650 points. Germany’s industrials-heavy DAX index was expected to rise 5.7% to 14,650 points.
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