Europe – conditions are ripe for a genuine rebound.
The economic outlook in Europe has brightened considerably since the start of the year. PMI readings indicate the economy is nearing expansion territory thanks to a robust services sector, which is still the region’s primary growth driver. What’s more, the uptrend looks set to continue.
Several reasons suggest we should again look optimistically at consumer spending, which could turn out to be surprisingly strong. For one thing, the job market is firm – unemployment is close to record lows and real wages are set to rise as a result of disinflation. Once consumer confidence is restored, households should start tapping into the savings they built up during the pandemic. On top of that, the latest bank surveys indicate that lending conditions are easing and demand for loans is picking up. And lastly, businesses have finished running down their inventory, which augurs well for the manufacturing sector. This combination of factors could undermine analysts’ still-conservative forecasts for the European economy.
Several stock market indexes rose to fresh highs in Q1 2024 as the rally that started late last year continued into this one. While it’s true that investors’ extremely bullish view could give rise to a near-term consolidation, we believe European equities have a lot going for them. First, recent macro trends are very encouraging. The increase in PMIs, coupled with slowing inflation and the ECB’s expected first rate cut in June, should support stock prices in the coming months. Second, the 4% consensus estimate for earnings growth in 2024 is slightly lower than the estimates for other regions. So an uptick in Europe’s economy should trigger upwards revisions to earnings forecasts. In addition, European companies are carrying out significant share buybacks, which will also support earnings growth. In short, there’s scope for positive surprises on this front. It’s also worth noting that European stocks remain highly affordable, despite the recent rally. Three more promising signs are that fund outflows seem to have stopped, US investors are starting to regain interest in European equities and cyclical stocks make up much of Europe’s indexes. Under these conditions, it’s hard to not be confident about the months ahead!
USA – a major sector rotation
This year began much as the last ended for the US market. Growth stocks, particularly in the tech sector, continued on their upward trend in the first few weeks of 2024, spurred by expectations of a rate cut and investors’ growing interest in AI. Just a few weeks ago, only two sectors were outperforming the S&P 500 so far this year: tech and communication services. However, this trend is now reversing, with cyclical sectors accounting for a growing share of the index’s performance. Today, the energy, industrials and materials sectors are quickly rising up the ranking, while more defensive segments are falling out of investors’ favour. This makes sense, given that the US economy is showing signs of picking up. Two key activity indicators, for manufacturing and services, are now in expansion territory. All this means that investors are positioning themselves for what looks to be the most likely scenario for the US economy – a “no landing”.
This week's figure : 303,000
This is the number of new jobs created in the US in March. The stronger-than-expected figure is 100,000 above economists’ forecast. It’s yet another sign that the US economy is hardly slowing despite the monetary policy tightening in recent quarters.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
