The economy is declining and the stock market is hitting new highs. Can European stocks hold up?

Central banks cut interest rates in turn, and China's "policy spree" ignited global optimism. European stock markets closed at a new high on Friday. The pan-European Stoxx 600 index closed up 0.47% to a new high, the German stock index rose 1.7% to a new high, luxury goods stocks jumped, and LVMH and kering both rose nearly 10%.

Since the beginning of this year, European stocks have been strong and hit record highs. However, for the follow-up trend of European stocks, the fund managers of Goldman Sachs Group, BlackRock and Northern Trust Asset Management Company expressed concern that the rise of European stocks is facing severe challenges.

They warned that investors need to be alert to the economic downturn in Europe and its impact on corporate profits. In addition, the variables in the US election have added new uncertainties to the market. With the entry into the last quarter in 2024, the market sentiment is increasingly turbulent. The strong gains of European stocks in the first half of the year have turned into frequent fluctuations in the past few months.

Europe's inflation has cooled but the economy has shrunk, and the stock market has insufficient motivation to rise.

The weak European economy is in stark contrast to the record high of the stock market in this region. Although inflation has further cooled down and the inflation rate in France and Spain has fallen below 2%, private sector activities in the euro zone have shrunk this month, and the risk of economic recession in Germany has become more and more prominent.

In September, the comprehensive PMI of the euro zone dropped to 48.9, which was lower than that of threshold for the first time since February this year. Both Germany and France accelerated their contraction. The initial value of Germany's comprehensive PMI declined for the fourth consecutive month. The French service industry fell back into contraction, and manufacturing sales dropped significantly.

Northern Trust Asset Management Co., Ltd. lowered its allocation of European stocks from overweight to neutral this week due to concerns about the macroeconomic prospects. Anwiti Bahuguna, chief investment officer of the company's global configuration, pointed out:

Economic data is unstable. Although inflation has declined, it is not enough to support a sharp interest rate cut. The current market environment is not suitable for taking too high risks.

The US election adds uncertainty.

Since the European benchmark index hit an all-time high in May, it has repeatedly failed to break through this resistance level, indicating that this point is still a key obstacle to the market. The analysis pointed out that if Trump wins in the US election, it may have a major impact on the income of European companies.

Barclays strategists warned that if this triggered the "trade friction" between Europe and America, the profit growth of European companies would be significantly dragged down, especially the German and Italian stock markets, as well as capital goods, automobiles, technology and other industries.

The political uncertainty in France has also put pressure on the stock market in this region. The performance of the Paris market is inferior to other major stock indexes, and investors have doubts about the stability of the new government.

Helen Jewell, chief investment officer of BlackRock's basic stocks in Europe, Middle East and Africa, said that European stocks are currently in a highly sensitive stage:

The results of the US election are unpredictable, the macroeconomic outlook is also full of uncertainty, and the fragility of the market may continue until 2025.

The key to the trend of European stocks lies in corporate profits.

Strategists at Barclays and Citigroup said that China's policy measures may have a positive impact on cyclical stocks such as mining, automobile manufacturing and consumer goods. According to the analysis, China's recent stimulus policy may be the key to promote STOXX Europe 600 Index's rise at the end of the year. After all, about 8% of the index's income comes from China.

However, Gilles Guibout, head of European stocks at AXA Investment Bank, reminded that the key to the future trend of European stocks will be corporate profitability. He said:

Ultimately, the future direction of the market will depend on the company's earnings performance to be announced soon.

The third-quarter results to be announced by European companies in mid-October are crucial for assessing the impact of the European economic slowdown on consumer demand.

Analysts in JPMorgan Chase warned that sales of Novo Nordisk's best-selling diet drug Wegovy may be lower than expected, which may be one of the early signs of the performance trend this quarter. At the same time, Sweden's H&M also said that its key profit target is difficult to achieve, and the prospect of the retail industry is increasingly worrying.

Risk warning and exemption clause

The market is risky and investment needs to be cautious. This paper does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific situation. Invest accordingly at your own risk.