HSBC (LON:HSBA) has released its updated outlook for European stocks in the second half of 2024, highlighting the importance of earnings growth to maintain positive price momentum amidst mixed economic data.
According to HSBC, the outlook is deteriorating as earnings growth estimates are declining.
HSBC notes that European equities underperformed their global counterparts in the first half of 2024, with the FTSE Europe index lagging behind the FTSE US, Emerging, and All World indices by 4.9%, 1.7%, and 3.7%, respectively.
The forecast suggests that interest rates will likely fall in H2 2024, but the motivation behind these rate cuts could significantly influence market returns.
HSBC analysts suggest that cyclical sectors, especially Real Estate, could benefit from faster-than-expected interest rate cuts, while Financials might suffer if the cuts are perceived as a response to economic stalling rather than cooling inflation and resilient growth.
They note that valuations in the European market have sharply re-rated, posting a 26% return against earnings growth of just 5.1% this year.
However, HSBC highlights that the consensus 2024 EPS growth estimate has decreased from 5.8% at the start of the year to 4.8% now. This declining momentum in earnings growth leads HSBC to caution against expecting a repeat of the strong H1 price performance in H2.
In terms of sector preferences, HSBC maintains a mix of cyclical and defensive sectors as overweight, with Healthcare and Industrials being the top picks due to their high growth potential and supportive characteristics in a falling interest rate environment.
Additionally, HSBC favors the UK market for its attractive valuation and relatively stable political landscape, recommending small- and mid-cap stocks over large-cap ones. On the other hand, France is downgraded to underweight due to ongoing political uncertainty.
In conclusion, while HSBC sees some potential for market performance, it emphasizes that improved earnings growth is crucial for sustaining the current momentum in European equities.