"The probability of an extreme scenario has increased": strategists - on the threat to the market in Europe

If the Strait of Hormuz doesn't open soon, the case for European stocks will weaken significantly, strategists surveyed by Bloomberg said.

The consensus forecast of 16 analysts shows that the Stoxx Europe 600 index will end the year at 624 points - this is below the current level, at the end of trading on May 22, the index reached 625 points. And although the target itself has not changed much over the month, warnings about the growing threats to the European economy and stock market because of the war in Iran sound louder, the agency notes.

The economy has already started to feel the effects of the Iranian crisis: business activity in the eurozone contracted at the fastest pace in two and a half years. After a strong corporate reporting season, analysts expect double-digit profit growth this year, mainly due to the energy sector and a recovery in consumer demand. However, so far this scenario looks overly optimistic, Bloomberg points out.

- "In the short term, we see very limited upside potential. For years, investors have been overly cautious and have had to catch up with a market that was going away, but this time the share of European stocks in everyone's portfolios is already overvalued. Risks are real, and it is impossible to ignore them", - warned the strategist of Deutsche Bank AG Maximilian Uhler. The analyst kept his forecast for Stoxx Europe 600 at the end of the year at 640 points, but recognized that the threat of extreme scenarios has grown to a "discomforting" level, and the longer the Strait of Hormuz remains closed, the higher the risk of negative developments.

- "European equities are trading near all-time highs and just 3% away from our year-end targets," said Citigroup strategist Beata Mantei, "According to our models, upward revisions to forecasts are still priced into European stock prices, while earnings for companies outside the commodities and technology sectors are at risk of further declines.

- "After European companies beat subdued expectations in the first quarter, we expect a more challenging reporting season in the coming quarters as the bar for expectations has been raised and the costs of the conflict [in the Middle East] start to take their toll. Fundamentals seem to be coming to the fore again," emphasizes SocGen strategist Roland Caloian. His forecast is the most pessimistic on the market, it assumes a 7.2% drop in the Stoxx Europe 600 index to 620 points.

- "European companies' first-quarter results, led by the energy and technology sectors, beat expectations, but market reactions show the market has become more demanding. Stocks' performance on the day of reporting suggests investors are paying more attention to the sustainability of companies' earnings and outlooks amid rising geopolitical risks," points out Laurent Douillet, senior equity market strategist at Bloomberg Intelligence, "The cycle of raising forecasts is becoming more concentrated in the commodities and technology sectors, while bo

According to a survey from Bank of America released this week, fund managers have, for the first time since December 2024, on average reduced the proportion of European equities in portfolios relative to the global market. There are now 4% more such investors than those maintaining an increased share. By comparison, at the start of the war with Iran, those who increased their investments in European securities outnumbered the skeptics by 35%.

One of the key indicators of BofA signals the risk of a sharp decline in the European stock market in the coming weeks, reports CNBC. European Momentum Conviction Indicator (MCI), which assesses the stability of the recent growth of shares and the likelihood of continuation of the trend, collapsed to 17 points. The critical level, as explained by analysts of the bank, is considered to be 30 points. Falling of the indicator below this mark means the increased threat of sharp reversal of strategies, betting on continuation of growth of shares. Such reversal may take place within the next 4-8 weeks, the investment bank points out.

According to BofA analysis, more than $1.5 billion has been withdrawn from Europe-focused funds in the past week. For them, this is the fifth consecutive week of capital outflows.

This article was AI-translated and verified by a human editor