European Stocks Have Further to Fall, Goldman Warns

September 27, 2022 8:48 AM EDT

By Geoffrey Smith -- European stocks may have had a wretched year so far, but they still have further to fall, according to Goldman Sachs analysts.

Goldman's equity strategists told clients in a note they expect to see the STOXX 600 at 360 on a three-month basis, down around another 8% from its current levels, with cyclical, chemicals, and construction stocks all likely to underperform in the current environment of slowing growth and rising interest rates.

They expect the index to recover to 380 on a six-month view and then to hit 410 within 12 months.

Even at that level, however, Europe's benchmark stock index would still be down some 17% from its peak in January of this year – excluding dividend payments.

"To see a trough, we believe we need (i) genuinely low valuations, (ii) an end to the deterioration in growth (even if the level of GDP is not at a trough), (iii) a peak in inflation and rates and (iv) light positioning," Goldman said. "We would argue we are not decisively there for any of these in the U.S. or Europe."

Currency weakness is likely to support earnings in the current year – the euro is down 15% against the dollar so far in 2022, and STOXX 600 companies earn 55% of their revenue outside Europe – but Goldman argues that a 0.4% drop in Eurozone GDP next year will more than offset that tailwind. Its analysts expect earnings per share to fall 17% in 2023.

The analysts pointed out that consensus estimates for earnings have been slow to reflect a poorer economic outlook, visible in various surveys and hard economic data over recent months. They cited consensus estimates compiled by FactSet which suggests analysts still expect earnings to rise 3% next year and 6% in 2024.

"There is a substantial gap between the survey data which has moved into contraction, and EPS estimates which have flattened modestly but remain far above the levels normally associated with this pace of economic growth," Goldman said.

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