Goldman Sachs strategists have adjusted their market outlook for Europe, setting a new 12-month target for the Stoxx Europe 600 Index at 510, up from their previous forecast of 500.
This revised target, which implies a 5% price upside from Wednesday's close through the end of the year, reflects optimism grounded in cheaper valuations and anticipated improvements in the European economy.
“Valuation has risen and, on a P/E of 13.0x, Europe trades only a shade below its longer-term average, although it remains on a sharp discount to the US (even sector-adjusted),” analysts said in a note.
This pricing discrepancy offers an attractive entry point for investors looking towards Europe, Goldman Sachs strategists said. The bullish outlook is bolstered by several key economic indicators.
Positive shifts in Purchasing Managers' Indexes (PMIs), stronger recent order data, a peak in interest rates, and a secure gas supply all signal a turning point for Europe's economic prospects.
Moreover, sectoral adjustments by Goldman Sachs indicate a favorable view towards consumer-related sectors, with travel and leisure as well as consumer products and services stocks being upgraded to overweight from neutral. Retailers maintain their overweight status, benefitting from a conducive economic environment.
Furthermore, luxury goods are expected to gain from improved wealth dynamics in the US, while industrial goods and services, along with construction and building materials, have been upgraded due to lower energy costs and rising demand.
Conversely, energy stocks have been downgraded to neutral and utilities to underweight, anticipating a further decline in power prices.
“Overall, we advocate a barbell strategy: we continue to like the GRANOLAS, big-cap global growing compounders with solid balance sheets. Consistent with this, we remain OW Tech and Healthcare, but we add a bit of cyclicality with recommendations on Consumer Cyclicals, and selective Industrials,” analysts concluded.