Europe’s largest stock rally in five years has left even the biggest bulls looking like bears.
Four gains in the past five days pushed the Stoxx Europe 600 Index above its peak from June 2007 on Thursday and to the highest close since 2000. The advance, at 17 percent for the year, left the gauge about 1 percent away from its all-time high in March 2000 — and above the forecasts of all 12 strategists surveyed by Bloomberg in January. The Stoxx 600 rose less than 0.1 percent at 9:25 a.m. in London.
Goldman Sachs Group Inc. has boosted its one-year target twice in 2015, while Citigroup Inc. and Credit Suisse Group AG both lifted their year-end forecasts this month. JPMorgan Chase & Co.’s projection for gains in another European benchmark measure is poised to be eclipsed. Even as data show fund managers at their most bullish on European equities, there’s still room for stocks to rise, says JPMorgan’s Emmanuel Cau.
While investors may consider the rally currency-driven and temporary, “there’s something much more sustainable here,” said Cau, a strategist in London. “Sentiment was bearish in the euro zone for a long, long time. It’s just starting to change.”
Stocks are poised for the best quarterly rally since 2009 on speculation stimulus from the European Central Bank will revive the region’s economy, while a 12 percent drop in the euro versus the dollar this year will boost profits. The region’s equities have also benefited from a migration of funds from the U.S. as the Federal Reserve signals it may raise interest rates this year.
Benchmark gauges across Europe make up the top 11 of 24 developed markets this year, with Denmark, Portugal and Germany posting rallies of more than 20 percent.
A net 63 percent of respondents in a Bank of America Corp. survey this week favored Europe -– a record since the question was first asked in 2001. At the start of the year, strategists on average expected European equities to rise 1.5 percent in 2015, according to a Bloomberg survey. Stocks surpassed that, rising 7.2 percent in January alone.
Strategists overestimated gains last year. European stocks were forecast to rally 12 percent in 2014, according to projections compiled by Bloomberg. They rose 4.4 percent for the period, as concern over euro-area deflation and Greek political turmoil hampered gains.
Goldman’s Peter Oppenheimer forecast this January that the Stoxx 600 would reach 390 in 12 months. He has since boosted his prediction twice, now projecting 440. Citigroup’s Jonathan Stubbs and Credit Suisse’s Andrew Garthwaite also raised their estimates this year. The annual rallies currently seen by the two brokerages would be the biggest since 1999.
JPMorgan projected in December that the MSCI Europe Local will climb to 1,550 by the end of 2015. The measure closed at 1,542.67 on Thursday.
Good news such as the weaker euro, lower oil prices and ECB stimulus is already priced in, according to Christian Stocker of UniCredit Bank AG. He forecasts the Euro Stoxx 50 Index will end the year 1.9 percent below Thursday’s close.
“By end of May and early June, it could be more difficult,” Stocker, a strategist in Munich, said by phone. “Valuations have jumped. Now we have to see whether the earnings come behind that development. When the Fed is more cautious, that’s not the best environment for U.S. equities and global equities.”
The Stoxx 600’s multiple based on projected profits rose 7.8 percent this year to 16.8 as of Thursday’s close, according to data compiled by Bloomberg. That’s on track for the fastest increase in five quarters, data show.
European stock valuations are still attractive compared with U.S. companies, and economic data are topping projections, said Wasif Latif of USAA Investment Management Co. Citigroup’s Economic Surprise Index, which rises when figures beat estimates, last month climbed to the highest since March 2013 for Europe. A similar gauge in the U.S. sank this week to a three-year low.
“I’m confident that Europe will outperform the U.S. given the valuation gap, the monetary dynamics, and even the macro factors are reversing,” said Latif, who helps oversee $28 billion in mutual funds as the head of global multi-assets at USAA. “This is a longer rally with more legs.”