Credit Suisse’s strategists forecast 10% earnings per share growth in Europe versus 6.8% EPS growth in the U.S.
“We expect that a catch-up in European corporate earnings will allow European equities to outperform U.S. equities,” Credit Suisse wrote. “Our technical analysts’ target for the Euro Stoxx 600 is 445, a 17% gain from current levels.”
Barclays Research is also bullish on European stocks because the outlook for their earnings growth rate is higher than in the U.S., the U.K. and Japan.
“Additionally, dividend yields above 3% provide attractive carry,” Barclays wrote in a “Global Outlook” report released Nov. 12. “But the case for European equities is undermined by our call for further euro weakness. We anticipate stronger local currency performance in euro area equities. But any returns should be offset by the currency move for investors who do not hedge foreign exchange risk.”
The risks to this trade are that European stocks fall because of weak economic growth, no new economic stimulus from the ECB, a resurgence in political conflict or little emerging market demand for European goods.
“Europe’s economy remains more exposed to the weakness in emerging market demand, as reflected in poor industrial performance, particularly in Germany,” Barclays wrote. “However, this seems to be compensated by the gradual strengthening of Europe’s domestic economy, as, on balance, recent indicators suggest relative resilience to the external challenges.”
By Ky Trang Ho, Forbes