Strategists at Deutsche Bank have downgraded European stocks to a neutral rating, citing “muted” upside potential for stocks in the coming weeks and uncertainty surrounding the monetary policy outlook of major central banks. The financial markets have experienced a shaky start to 2024, which has added to the cautious sentiment.
Deutsche Bank strategists, led by Maximilian Uleer, head of European equity and cross-asset strategy, anticipate the markets to predominantly trade sideways with a mild setback of no more than 5% from current levels. They believe that this setback will mainly impact areas of the market that experienced significant inflows in the fourth quarter of the previous year.
Initially, the bank had given an overweight rating to European equities going into 2024 due to rising government bond yields and disappointing corporate earnings reports. This suggested potential upside for equities. As expected, European stocks rallied towards the end of 2023, driven by growing optimism that European central banks and the Federal Reserve would implement interest rate cuts earlier and more aggressively than anticipated by the markets.
“We maintain our belief that the ECB and the Fed will cut rates faster and more extensively than what is currently priced in by the market,” stated Uleer and his team on Monday. However, they expect this to become evident later in the year when central banks begin communicating their planned cuts openly.
Consequently, the relentless year-end rally has left limited room for further growth in the stock market as it enters 2024, according to Deutsche Bank strategists. They note that investor positioning in equities has significantly increased, while positive economic surprises have become less frequent, especially in the U.S.
See: Why stock-market investors will remain at mercy of shifting rate-cut expectations after wobbly start to 2024
European Stocks Expected to Remain Bullish in 2024
Despite a recent downgrade, the bank’s strategists maintain a positive outlook on European stocks for the duration of 2024. Uleer and his team anticipate a short-term pullback in European stocks, but they believe that increased investor positioning has not reached overbought territory.
The team predicts potential stable economic growth in China, as well as a resurgence of growth in the U.S. and Europe during the second half of 2024. As a result, corporate earnings could increase by 5%, and price-to-earnings multiples may expand by 0.5 points. These factors suggest a potential upside of approximately 8% for European stocks in 2024.
Last week, European shares experienced their first weekly loss in eight weeks. The market digested a robust U.S. jobs report, implying that the Federal Reserve may not need to cut interest rates as initially expected. However, on Monday, the STOXX 600 index XX:SXXP recorded a modest gain of 0.4%.
Turning to the U.S. market, Deutsche Bank holds the most bullish outlook among Wall Street’s 2024 forecasts for the S&P 500 SPX. They predict that the benchmark index will reach 5,100 by the end of the year, indicating a roughly 7.8% increase from Monday afternoon’s level of 4,732 (according to FactSet data).
On Monday, U.S. stocks showed signs of recovery after breaking a nine-week winning streak last Friday. The Nasdaq Composite COMP rose by 1.5% to reach 14,746, while the Dow Jones Industrial Average DJIA remained nearly flat at 37,459 (according to FactSet data).