European equities: outlook for 2025
2025-01-15
■ In 2024, the stock index will not rise as well as the US and Japanese stocks, and the downward trend of corporate earnings expectations will become the main drag
■ The triple dilemma faced by European companies has not improved, and it is difficult to significantly boost market momentum
By cutting interest rates alone in 2024, although the STOXX 600 index has risen in the first half of the year, it has shown a volatile trend in the second half of the year. The SNB's surprise rate cut in March, coupled with expectations of an early rate cut by the European Central Bank (ECB), provided some support to equities. At the same time, the surge in artificial intelligence (AI)-related demand also gave a boost to the market, with the index rising above 520 points from around 480 points at the beginning of the year. However, as recession fears intensified in August, the market corrected sharply, with the index falling to around 470 at one point. Despite the subsequent recovery above 520 points, uncertainty over the outlook for the Chinese economy within Europe and China continued to weigh on the market, resulting in a continuous downward revision of the estimated earnings per share (EPS) of the STOXX 600 index limiting the upside of the index. For the year, the stock index has roughly remained in the range of 500-530 points, with a rise of only 6.0% for the year.
European equities (6.0%) have significantly lagged US equities (S&P 500 up 23.3%) and Japanese equities (Nikkei 225 up 19.2%) in 2024. This difference is mainly reflected in the difference in earnings per share (EPS) expectations. In terms of EPS growth forecasts for 2025 (FY2025 for Japanese equities), the US stock market has been raised from 12% to 15% and then maintained around 14%, the Japanese stock market has remained stable at 8%-10%, and the European stock market forecast has been lowered from 9.2% to 7.7%. In terms of EPS, the "Revised Index" (RI), which yields a percentage of analyst upward revisions minus the proportion of downward revisions over the past month. It is currently -17.5% and has been negative since late June 2023, indicating the dominance of analysts' downward expectations for corporate earnings. European companies still face the following three difficulties: (1) sluggish regional economic growth; (2) the new U.S. administration may raise tariffs, resulting in a deterioration in the performance of exporters; (3) The Sino-US trade friction has led to a further decline in Chinese demand, which in turn has dragged down the performance of high-end brand giants.
In the July-September 2024 period, the information technology (IT) sector in the STOXX 600 index accounted for only 8.0% of EPS, indicating that it is less likely to benefit from the growth in artificial intelligence (AI)-related demand. Sectors such as financials (36.9%), healthcare (13.9%), energy (10.8%) and capital goods (10.5%) are heavily weighted and are more vulnerable to interest rates and economic fluctuations. Unlike the energy sector in 2022 or the financial sector in 2023, there is currently a lack of a dominant sector that can drive overall EPS growth.
The current market is trading at a forward price-to-earnings (PER) of 13.0x, which is lower than the average since 2018 (14.1x), indicating that the market is relatively undervalued. While the ECB's rate cut may lead to a rise in price-to-earnings (P/E) led stock prices, the momentum for equity gains remains limited in the absence of an improvement in EPS expectations. In addition, if a ceasefire agreement is reached between Russia and Ukraine, the need to rebuild could significantly change the performance of European stock markets. This is a development to keep an eye on.
■ The triple dilemma faced by European companies has not improved, and it is difficult to significantly boost market momentum
By cutting interest rates alone in 2024, although the STOXX 600 index has risen in the first half of the year, it has shown a volatile trend in the second half of the year. The SNB's surprise rate cut in March, coupled with expectations of an early rate cut by the European Central Bank (ECB), provided some support to equities. At the same time, the surge in artificial intelligence (AI)-related demand also gave a boost to the market, with the index rising above 520 points from around 480 points at the beginning of the year. However, as recession fears intensified in August, the market corrected sharply, with the index falling to around 470 at one point. Despite the subsequent recovery above 520 points, uncertainty over the outlook for the Chinese economy within Europe and China continued to weigh on the market, resulting in a continuous downward revision of the estimated earnings per share (EPS) of the STOXX 600 index limiting the upside of the index. For the year, the stock index has roughly remained in the range of 500-530 points, with a rise of only 6.0% for the year.
European equities (6.0%) have significantly lagged US equities (S&P 500 up 23.3%) and Japanese equities (Nikkei 225 up 19.2%) in 2024. This difference is mainly reflected in the difference in earnings per share (EPS) expectations. In terms of EPS growth forecasts for 2025 (FY2025 for Japanese equities), the US stock market has been raised from 12% to 15% and then maintained around 14%, the Japanese stock market has remained stable at 8%-10%, and the European stock market forecast has been lowered from 9.2% to 7.7%. In terms of EPS, the "Revised Index" (RI), which yields a percentage of analyst upward revisions minus the proportion of downward revisions over the past month. It is currently -17.5% and has been negative since late June 2023, indicating the dominance of analysts' downward expectations for corporate earnings. European companies still face the following three difficulties: (1) sluggish regional economic growth; (2) the new U.S. administration may raise tariffs, resulting in a deterioration in the performance of exporters; (3) The Sino-US trade friction has led to a further decline in Chinese demand, which in turn has dragged down the performance of high-end brand giants.
In the July-September 2024 period, the information technology (IT) sector in the STOXX 600 index accounted for only 8.0% of EPS, indicating that it is less likely to benefit from the growth in artificial intelligence (AI)-related demand. Sectors such as financials (36.9%), healthcare (13.9%), energy (10.8%) and capital goods (10.5%) are heavily weighted and are more vulnerable to interest rates and economic fluctuations. Unlike the energy sector in 2022 or the financial sector in 2023, there is currently a lack of a dominant sector that can drive overall EPS growth.
The current market is trading at a forward price-to-earnings (PER) of 13.0x, which is lower than the average since 2018 (14.1x), indicating that the market is relatively undervalued. While the ECB's rate cut may lead to a rise in price-to-earnings (P/E) led stock prices, the momentum for equity gains remains limited in the absence of an improvement in EPS expectations. In addition, if a ceasefire agreement is reached between Russia and Ukraine, the need to rebuild could significantly change the performance of European stock markets. This is a development to keep an eye on.