By Danilo Masoni and Lucy Raitano
MILAN/LONDON (Reuters) - Concerns over recession and sticky inflation will weigh on European shares over the coming months but fading policy headwinds could see the main benchmarks reach new highs next year, a Reuters poll found.
Fund managers and strategists surveyed over May 10-23 forecast the region-wide STOXX Europe 600 index would drop to 435 points by the end of 2023, down 7.2% from Monday's close, as earnings growth slows.
Milla Savova, strategist at Bank of America (NYSE:BAC) Merrill Lynch, said weakening macro momentum could lead to meaningfully wider risk premia and earnings (EPS) downgrades before the cycle turns.
She expects the STOXX to fall as low as 365 points early in the October quarter and recover to 410 by year-end, compared to a poll range of 380-490.
"Once growth momentum starts to rebound in response to a fading drag from aggressive monetary tightening, we expect this to translate into a renewed rise in the STOXX 600," she said.
The STOXX has risen around 10% this year, recovering losses suffered in March following U.S. regional bank collapses and the downfall of Credit Suisse (SIX:CSGN).
Stronger-than-expected earnings and the quick intervention of authorities in the United States and Switzerland to contain the banking crisis helped markets regain their footing.
But prudence is taking hold again with the European Central Bank expected to keep hiking interest rates, even as the Federal Reserve has signalled a pause and with markets largely anticipating a U.S. debt ceiling deal.
"Equity markets already appear to have priced in much of the good news, anticipating both a soft landing for the economy and a victory for the central banks," said Eric Turjeman, Co-CIO Mutual Funds at Ofi Invest Asset Management, reiterating its cautious tactical approach.
"Although we remain upbeat about the year, we will probably witness some episodes of uncertainty that should be taken advantage of to shore up exposure."
First-quarter earnings are expected to have risen 7.3% in Europe, with six out of ten companies beating expectations so far, according to Refinitiv I/B/E/S data. Profits however are expected to decline in the subsequent two quarters before growing again in the last three months of the year.
The median view from poll respondents forecasts the STOXX 600 to reach 480 points by mid-2024 and 507 points by end-2024.
The STOXX index of the euro zone's top 50 blue chips was seen falling around 2% from Monday's close to 4,300 points by end December, before rising to 4,725 points over the next year. The index is up 15.6% year to date.
"The massive hiking cycle will show real economic effects," said Deka Bank strategist Joachim Schallmayer.
"The economic data has to show that we enter a soft landing. That would clear the way for a loosening in monetary conditions and will open the perspective for earnings growth in 2024."
Germany's DAX is seen closing 2023 at 15,900, down 2.0% from Monday, France's CAC 40 and Italy's FTSE MIB were expected to fall 7.7% and 6.6% respectively by year-end and Spain's IBEX by 7.0%.
Britain's FTSE 100 is seen ending this year at 7,775 points, broadly in line with Monday's close, before rising to 8,100 and 8,351 points respectively by mid- and end-2024.
(Other stories from the Reuters Q2 global stock markets poll package:)