Bernstein Strategists Say Europe Stock Rally Has Further to Run

(Bloomberg) - The strong start to the year for European stocks isn’t done yet, according to Bernstein strategists.

After gains of about 7% in the Stoxx 600 Index so far this month, a team led by Sarah McCarthy still sees “moderate upside,” they wrote in a note on Tuesday.

Their confidence is based largely on valuations that remain much cheaper than the US, even after the region’s outperformance of the past three months. In that time, the European benchmark has surged nearly 15%, about double the gains seen for the S&P 500.

“The region is still trading at a discount to its average historical multiple, both in absolute and relative terms,” the strategists said. With a price-to-forward-earnings ratio of about 13, the Stoxx 600 trades at a 25% discount to the S&P 500, bigger than the 15% average of the past 17 years.

The Bernstein team also sees earnings as supportive of Europe. With expectations much lower than for US peers this year, the region has room for positive surprises, they say.

And while the US is widely regarded as a hotbed for stock repurchases, European companies now buy back more of their market capitalization than US peers, the strategists say. Taking dividends and buybacks together, Europe is further ahead of the US than it’s ever been, supporting an overweight stance, at least tactically, they add.

Despite Europe’s rally, sentiment toward the region is still quite negative, according to Bernstein, citing the constant outflows from European funds since 2018, which accelerated in the past year. Even in the last few weeks there haven’t been any net inflows into European equity funds, while the US has been receiving them since 2020.

According to Citigroup Inc. strategist Chris Montagu, positive positioning appears to have been growing in Europe of late, due mainly to short covering.

By Michael Msika


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