Why are investors filled with doubts about European stocks?
Despite a 5% rise in European stock markets year-to-date, investors are filled with doubts, mainly due to a lack of catalysts and insufficient growth momentum. Goldman Sachs expects a 0% growth rate in earnings per share for 2025 and only 4% for 2026. The price-to-earnings ratio has reached 14.2 times, close to historical highs. Although domestic investors have returned as buyers, the trend of capital inflows is weakening. The tax policies in the United States also pose a threat to European companies
Despite a decent increase since the beginning of the year, European stock markets are facing growing skepticism from investors.
According to a report from Goldman Sachs on June 20, although the STOXX 600 index has risen 5% year-to-date, this increase is entirely due to value revaluation and dividend yield, rather than earnings growth.
In terms of sector performance, the banking and utilities sectors have performed the best year-to-date, while the automotive and biotechnology sectors have performed the worst. The banking sector has benefited from the interest rate environment and valuation recovery, showing significant gains year-to-date. In contrast, the automotive sector is facing weak demand and structural challenges, resulting in continued poor performance. From a style perspective, value stocks have significantly outperformed growth stocks, and small-cap stocks have performed slightly better than large-cap stocks.
Investor concerns about the European market are mainly focused on two key issues: a lack of recent catalysts and insufficient growth momentum.
Goldman Sachs expects the earnings per share growth rate for STOXX Europe to be 0% in 2025 and only 4% in 2026.
The performance of European stocks over the past 12 months has relied entirely on value revaluation and dividend contributions, while returns in other regions have been driven by a mix of earnings and valuation. The price-to-earnings ratio of European stocks has reached 14.2 times, close to the 70th percentile of the historical range, and is no longer cheap. Strong currencies, weak economic growth, and low oil prices have all weighed on European earnings per share.
Although European stock markets have seen strong net inflows of funds year-to-date, particularly from the return of domestic investors, this trend is weakening.
Goldman Sachs statistics show that after domestic investors continuously sold European stocks over the past few years, they have returned as buyers this year, becoming the main driver of fund inflows. However, based on the flow in recent weeks, this trend is slowing down, primarily because domestic investors have shifted from net buying to nearly zero net purchases. It is worth noting that this softening of fund flows is not unique to Europe; a similar phenomenon has also occurred in the U.S. market.
The Senate version of the Section 899 tax policy in the U.S., while milder than the House proposal, still poses a threat to European companies.
This policy delays the implementation date to 2027 (originally 2026) and sets a tax rate cap of 15% (originally 20%), but has a broad scope, covering all companies from "discriminatory foreign" entities, including European listed companies with more than 50% U.S. ownership. European companies with high U.S. revenue exposure are the most vulnerable, with the GSSTAMER index down 6% relative to the STOXX 600 year-to-date, and earnings per share expectations revised down by 11%.
Given the current market environment, Goldman Sachs recommends that investors continue to view Europe as a relatively cheap option compared to the U.S., and believes there are structural reasons to increase European allocations based on concerns about U.S. exposure and the high concentration of U.S. stocks. However, investors should focus on value areas with good growth prospects or catalysts (such as banking and telecommunications), concentrating on companies that return cash to shareholders or have clear catalysts
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