BofA, JP Morgan cut price targets for European markets on recession fears

The rally in European stocks appears to have come full circle, strategists predict, with last month’s gains coinciding with cuts in their year-end price targets by both Bank of America and JPMorgan .

The Stoxx Europe 600 index will close 2022 at 447 points, implying gains of less than 2 percent from now, according to the average of 15 estimates in Bloomberg’s monthly survey. This is little changed from the previous survey, in a period when the index rose more than 3%. For the year, the European benchmark is expected to fall 8%, which would mark its worst annual performance since 2018.

With global economic growth still facing “significant” challenges, Bank of America strategist Sebastian Raedler expects the rally to stall. His year-end target for the Stoxx 600, which is 390, is among the most pessimistic, having fallen about 9% in the past month.

“The main condition for a sustained rally in equity markets is a reversal of the macroeconomic cycle with a recovery in growth momentum,” Raedler wrote in an Aug. 12 note. The expected decline in economic activity and the looming energy crisis will prevent that, he said.

The strong rally from early July lows, fueled by a resilient period of corporate earnings and bets that the US Federal Reserve will slow the pace of interest rate hikes, is already showing early signs of slowing. The minutes of the Fed’s last meeting signaled that it is walking a narrow path between taming inflation and slowing growth.

Strategic analysts, including Beata Manthey of Citigroup Inc. have warned that the outlook for European earnings remains murky given the possibility of a recession. It expects regional profits, excluding the UK, to fall by 2% in 2022 and by 5% in 2023.

JPMorgan strategists have cut their year-end target for the Stoxx 600 by 3% since the July survey. Still, they remain among the firmest top “bulls” for stocks, saying the economic outlook is now priced in, while further bad news could be interpreted as good and lead to a policy shift. Their new target implies gains of an additional 10% for the European benchmark, which would mean an end similar to that of 2021.

Investors in Bank of America’s latest survey of European fund managers agree with JPMorgan’s view that the stock rally can continue even if they expect earnings to decline. However, the majority of strategies say otherwise.

Matt Peron, director of research at Janus Henderson Investors, said stock markets have become “overly optimistic” about the outlook for economic growth. “It is premature to assume a mild slowdown with little impact on earnings, which is what the market is implying,” he said.