Goldman, BlackRock Warned European Stock Rally Faces Tough Headwinds

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(Bloomberg) — European stocks face multiple hurdles to extend their 2024 rally after hitting another record high this week.

Money manager at Goldman Sachs Group Inc., BlackRock Inc. and Northern Trust Asset Management warned investors to be prepared for increased risks from the poor economy in the region and its impact on company earnings. The US election adds another layer of uncertainty.

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Markets are bracing for a volatile final quarter as the unstoppable rally in the first half has turned into fluctuating peaks and troughs over the past three months. And while China’s long-awaited stimulus measures may provide new momentum, the bar is high for equities to deliver meaningful gains.

Stocks are “sensitive right now,” said Helen Jewell, head of fundamental equity investments for Europe, the Middle East and Africa at BlackRock. “The US election is hard to call, and you’re not sure about the macro outlook. This fragile market will continue until we get visibility into 2025.

Europe’s weak economic backdrop contrasts sharply with the region’s top-performing equity benchmarks. While fears of a global recession eased as investors grew more confident about US growth, private sector activity in the eurozone shrank this month and forecasts pointed to a contraction in Germany.

This week, Northern Trust cut its European allocation to neutral from overweight, citing a worrisome macro outlook.

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“Economic data looks shaky,” Anwiti Bahuguna, head of global allocation investments at the $1.2 trillion asset manager, told Bloomberg TV. “Inflation is coming down, but not fast enough to think there will be any sharp relief on the rate front. This is not a place to take a lot of risk.

Income Risk

Third-quarter earnings, due to begin in mid-October, will be important in assessing the impact of weaker growth in consumer demand.

In an early sign of how the season may unfold, JPMorgan Chase & Co. analysts warned that Novo Nordisk A/S’s quarterly earnings may show slower-than-expected sales of blockbuster weight loss drug Wegovy. Investors are also weighing their bets on retailers after Sweden’s Hennes & Mauritz AB said it is unlikely to meet key profit targets for the year.

Expectations for full-year earnings have fallen about 2.8% since January, according to data compiled by Bloomberg Intelligence. Still, some investors say those estimates are too high, setting the stage for further declines.

“Our fund position is not very aggressive,” said Nicolas Simar, senior equity fund manager at Goldman Sachs Asset Management. “Short term, there is little room for profits to increase substantially.”

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Simar specifically warned about the prospects of consumer goods companies, which have been affected by a drop in demand in key markets like China.

Gamble selection

The US presidential election could have a big impact on European earnings if Donald Trump wins.

Republican candidates have proposed 10% import tariffs and steeper levies on goods made in China. If this leads to a “full-blown trade war” and results in a “high single-digit drag” on regional earnings growth, said the Barclays strategist.

German and Italian stocks, as well as the capital goods, auto, beverage, technology and chemicals sectors appear to be most at risk, he said.

Political upheaval in France has also weighed on the region’s equities, with Paris underperforming its major peers this year as investors lose faith in the new government’s ability to survive.

Regional benchmarks also face tests on technical indicators. The previous record high has proved to be a key point of resistance, with the index failing to rise above that level on four occasions since May.

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The China effect

Stimulus measures in China may be just what the Stoxx 600 needs to kick off a year-end rally as companies return about 8% from the Asian nation.

Market strategist at Barclays and Citigroup Inc. said that China’s measures had made the outlook for so-called cyclical stocks – miners, automakers and prudent consumer spending – which had lagged on the defensive in the third quarter. A basket tracking European cyclical stocks rose 3.2% this week, while defensive measures remained flat.

Even so, past promises of recovery in China have been disappointing as promises of stimulus have failed to produce meaningful progress. While the latest measures may have a long-lasting impact on local assets, the effect on Chinese consumers down the line is questionable, according to Bahuguna Northern Trust.

That also makes the outlook for European luxury goods makers cloudier. The sector – which depends on China for a fifth of its revenue – has suffered as the downturn has pushed shoppers to discount brands, and even the latest stimulus measures may not reverse it now.

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Meanwhile, carmakers are trying to climb out of a deep hole, with the Stoxx 600 Automobiles & Parts Index rallying the most since November this week. It remains the second worst performing sector in Europe this year, just behind energy and partly hampered by European trade tensions with China over electric vehicles.

Gilles Guibout, head of European equities at Axa IM in Paris, said the impact of China’s latest measures remains to be seen.

“It’s too early to say right now,” he said. “But at the end of the day, the upcoming earnings will set the market trend going forward.”

—With help from Christian Dass.

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