Favored by multiple Wall Street investment banks! Survey: European stocks are expected to outperform U.S. stocks this year

Many Wall Street strategists believe that as the economic outlook for Europe improves, European stock markets are poised for their best annual performance relative to the US market in two decades.

According to the average forecast of 20 strategists surveyed by the media, the STOXX Europe 600 Index is expected to climb to around 554 points this year. As of Monday's (May 19) close, the STOXX 600 Index stood at 549 points, implying a potential further climb of about 1% for the year. Notably, the index has already risen by more than 8% year-to-date.

In contrast, strategists are far less optimistic about the outlook for the US market. Another media survey found that strategists, on average, forecast the S&P 500 Index to close at 6,001 points this year, basically flat with its Monday closing price, while the index has only risen by 1.6% year-to-date.

Among them, JPMorgan Chase has set a target of 580 points for the STOXX 600 Index, one of the highest targets in the survey. Citigroup, on the other hand, expects the index to rise by 4% to 570 points this year as analysts' pessimism about corporate earnings eases. Both banks predict that the US benchmark index will decline for the remainder of the year.

Citigroup strategist Beata Manthey, commenting on European stock markets, said, "We have moved past earnings uncertainty, which could lay the groundwork for further gains and potential re-rating, especially in those hard-hit cyclical sectors."

Shift in European Stock Market Forecasts

This forecast also marks a shift from expectations at the beginning of the year, when strategists anticipated that European stock markets would significantly lag behind the US market. However, as Germany's historic fiscal reforms and strong corporate earnings attracted investors seeking substitutes for US assets, sentiment towards European benchmark indices has rebounded.

A survey released by Bank of America a week ago showed that 35% of global fund managers are currently overweight European stocks, while net exposure to US stocks has fallen to its lowest level in two years.

According to data compiled by the media, earnings for MSCI Europe constituents grew by 5.3% in Q1, far exceeding analysts' expectations of a 1.5% decline.

Underlying Concerns

Admittedly, the STOXX 600 Index's year-to-date gain of over 8% has also sparked concerns about its valuation. The benchmark index currently trades at a price-to-earnings ratio of about 14.6 times, above the 20-year median of 13.5 times, though still below the S&P 500 Index's P/E ratio of nearly 22 times.

Of course, some investment bank strategists in the aforementioned surveys remain hesitant about the outlook for European stocks. For example, Societe Generale strategist Roland Kaloyan said he needs to see stronger earnings trends and a further reduction in tariff-related risks before betting on further gains for the Stoxx 600. His year-end target is 530, which implies a 3.5% decline from Monday's closing price.

"Uncertainty around tariffs further complicates the outlook, as many companies are reluctant to provide clear guidance, suggesting that the full impact of these tariffs may not yet be reflected in earnings forecasts," Kaloyan said.

UBS strategist Gerry Fowler, on the other hand, said that with expectations for stronger economic growth over the next two years, valuations have risen as expected. "To achieve further growth, we must navigate a period of uncertainty that could keep corporate earnings-per-share growth at or slightly below zero this year," he said.