Strategists see no reason to buy equities. The average of 16 forecasts in a Bloomberg News survey of equity analysts is for a 2% decline in the wider index by the end of the year, with several major investment banks expecting a sharper drop. Bank of America Corp.’s July survey of European fund managers shows two-thirds of investors expect stocks to decline over the rest of this year. More than 80% of those surveyed reckon earnings per share will deteriorate.
Justifying this year’s gains is getting tougher. JPMorgan Chase & Co. analysts note that after 90 major European companies reported their second-quarter earnings, the reaction to better-than-expected results isn’t as strong as usual. So far, around half of companies reporting have beaten consensus earnings-per-share forecasts, below the norm, and significantly shy of the US reporting season ratio of 75%.The euro zone’s preliminary purchasing managers surveys for July released on Monday make for grim reading. The strength shown in these forward-looking indicators in the first four months of this year was an important driver of equity gains. However, the bloc’s manufacturing measure is now firmly in a contractionary zone at 42.7. That’s the worst level since the early months of the pandemic. German manufacturing is in an even deeper hole at 38.8. The regional services sector indicator is still just above the 50 threshold that indicates growth, but was also well below economists’ expectations. The composite measure slipped to 48.9 — which suggests economic growth may well turn negative.
French and German PMI data show the two biggest economies are stumbling, with much worse-than-expected readings. The German economy is already in recession after two quarters of contraction, but France’s outlook looks to be noticeably deteriorating. Its manufacturing PMI hit a 38-month low of 44.5.
Second-quarter gross domestic product data due July 31 is expected to show 0.2% growth. That may prove to be a high point. The ECB’s June quarterly review revised down its 2023 growth estimate to 0.9%, with the next two years forecast to rebound by 1.5% and 1.6%, respectively. Those forecasts look increasingly optimistic; I expect downward revisions at the central bank’s September update.
Equity prices are determined by future earnings, but economic momentum is fading away sharply. There are several headwinds building. The extreme heat across Europe will exact a toll on tourism revenue after Mediterranean countries enjoyed a much-needed post-pandemic boost from the recovery in travel. The two best-performing sectors of the Stoxx Europe 600 this year are the retailers and travel & leisure sub-indexes, up 28% and 23% respectively. Low water levels in Germany’s Rhine River, a major conduit for intra-Europe transportation, are restricting navigation. A solution using new shallower barges may not make much difference this summer.
JPMorgan analysts warn that the benefit from lower natural gas prices this year, after rocketing prices following Russia’s invasion of Ukraine, to European firms’ costs is dissipating. They also flag that China’s patchy post-pandemic recovery remains a risk for the euro zone’s manufacturing exports. Meantime, the relative strength of the euro compared with the currencies of its trading partners, which has reached an all-time high, makes for heavy going for the export-driven bloc.
The ECB isn’t quite ready yet to pay full attention to the struggling economic outlook, with inflation still the main preoccupation for policymakers. A third consecutive 25 basis-point rate hike is expected on Thursday to bring its deposit rate up to 3.75%. That will be the ninth raise in a year.
Whether the ECB raises again in September, however, is up for debate. But even a pause in interest-rate hikes doesn’t mean a sudden end to the withdrawal of monetary stimulus. With the ECB’s super-cheap bank lending programs largely withdrawn and a further reduction in reinvestments of the quantitative easing bond program likely to be on the September ECB meeting agenda, the gloomy mood music emanating from Frankfurt isn’t going to brighten anytime soon.
Piling on the misery, the ECB’s quarterly bank-lending survey released Tuesday showed further evidence of a substantial tightening of credit conditions for households and corporates. Demand for business loans plunged by the most on record; that bodes badly for corporate investment and is a warning bell for any remaining equity enthusiasts.
Central banks are in no mood to change direction until there is incontrovertible evidence of inflation being firmly expunged from the economic body. While headline euro-zone consumer price increases may have nearly halved to 5.5% from a peak of 10.9% in October last year, the focus has firmly shifted onto how sticky core CPI and wage levels remain. Until and unless inflation is defeated, European equity bulls should continue to feel nervous about the market’s prospects.
More From Bloomberg Opinion:
• Forget 5 Months. Where Will Stocks Be in 10 Years?: John Authers
• Markets Are Propelled by What Hasn’t Happened: Mohamed El-Erian
• ECB Inches Nearer to the Interest-Rate Summit: Marcus Ashworth
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.
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