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(Bloomberg) — Some Wall Street strategists are betting European stocks will enjoy their best performance relative to the US in at least two decades as the region’s economic outlook improves.
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The Stoxx Europe 600 Index is expected to end the year around 554 points, according to the average of 20 strategists polled by Bloomberg. JPMorgan Chase & Co (JPM). has one of the highest targets at 580, suggesting a record lead of 25 percentage points over the S&P 500 Index (^SPX) as the bank expects the US benchmark to slide.
Citigroup Inc. predicts a 4% rally to 570 points, the biggest outperformance since 2005. Overall, the surveyed strategists see the Stoxx 600 index gaining about 1% from Friday’s close as analysts dial back some of their pessimism around corporate earnings.
“If we have already moved past peak earnings uncertainty, this could set the stage for additional upside and potential multiple re-rating, especially among more beaten-up cyclical sectors,” Citigroup strategist Beata Manthey said.
The outlook marks a turnaround from expectations coming into the year, when strategists were braced for European stocks to trail the US by a wide margin. But the benchmark has rallied as historic fiscal reform in Germany and resilient earnings attracted investors looking for an alternative to US assets caught up in the trade war.
The Stoxx 600 gained 0.5% on Tuesday, while S&P 500 futures fell 0.3%.
A Bank of America Corp (BAC). survey published a week ago found a net 35% of global fund managers are now overweight European stocks, while net exposure to the US has dwindled to the smallest in two years.
MSCI Europe constituents posted a 5.3% increase in first-quarter earnings, far better than the 1.5% decline expected by analysts, according to data compiled by Bloomberg Intelligence. A Citigroup index also shows fewer analysts have downgraded European estimates in the past few weeks.
In the US, strategists are far less optimistic about the market outlook. A separate poll by Bloomberg found forecasters expect the S&P 500 to end the year at an average of 6,001 points, roughly unchanged from Friday’s close.
To be sure, this year’s 9.0% rally in the Stoxx 600 has raised worries about valuations. The benchmark now trades at about 14.6 times earnings, higher than the 20-year median of 13.5, according to data compiled by Bloomberg. But that’s still lower than the S&P 500’s price-to-earnings ratio of nearly 22.