© Reuters. Goldman raises Stoxx 600 target, highlights ‘historic discount’ in European stocks
In the last six months, European stocks have seen a 12% increase, fueled entirely by price-to-earnings (PE) ratio expansion rather than actual earnings growth. During the same timeframe, the consensus estimate for 2024 earnings per share (EPS) has seen a 5% downward revision, Goldman Sachs strategists highlighted in a Monday note.
Currently, European equities are trading at 13.5 times their 12-month forward PE, which is slightly below the long-term average since 1990 by half a PE point, leaving investors wondering about the remaining upside potential in the market.
According to Goldman, its newly developed PE model implies that valuations within the (SXXP) index can grow roughly 2.5% over 12 months.
“Combined with our EPS growth forecast of 4% per annum by 2026, this implies a 6% price return over the next 12 months, 9% with dividends,” the investment giant’s strategists said.
These projections give a new 12-month Stoxx 600 target price of 540.
“Europe equities trade at a historical discount to US equities, even when we adjust their 12m fwd PE to medium-term expected profit growth (PEG ratio),” Goldman’s team noted.
“If economic growth modestly accelerates and central banks embark on a rate cutting cycle in June, as our economists expect, valuations will rise further,” they added.
European stocks have likely entered the “Optimism” phase of the equity cycle, during which valuations tend to increase despite a deceleration in profit growth.
Meanwhile, rising oil prices pose a dual risk to this outlook. While they have the potential to postpone the anticipated rate cuts, they could also positively impact earnings growth, strategists pointed out.
