Will European Stocks Rally in 2025?

Economic

Stocks

Summary:

Goldman Sachs Research expects European stocks to rally in 2025 even as the region faces headwinds from political and trade uncertainty and slow economic growth.

The STOXX 600 index, made up of European and UK companies, is forecast to generate a total return of about 9% next year (as of 19 November 2024) — which is modestly lower than Goldman Sachs Research’s projections for the index's US and Asian counterparts.

We sat down with Goldman Sachs Research senior strategist Sharon Bell to discuss the Europe equity strategy team’s outlook for stocks in 2025. The report, which is titled “2025 Outlook: Peer Pressure,” shows that the team slightly lowered their forecasts for the STOXX 600 for next year. At the same time, Bell points out that European stocks may benefit from cooling inflation, a larger than expected European policy response, or concerns about the prospect for returns from mega-cap US stocks.

Why did the team downgrade its STOXX 600 target prices for the next year?

We’re below consensus on growth: We’ve downgraded our economic figures and our earnings expectations for Europe in the last few months. Given all of that, we’ve also downgraded our price targets very slightly.

Europe has also seen a modest rise in risks. The stability of the fiscal situation in France, Italy, and to some extent the UK, is being questioned, for example. Economic data has been weak, and the manufacturing cycle, which particularly impacts Germany, has been really dire.

The news is not recessionary — it’s nowhere near as bad as what we saw in the financial crisis, the sovereign crisis, or the pandemic — and that’s why it’s a small downgrade. But there is undoubtedly an accumulation of risks along with weaker growth.

What sectors are you optimistic about?

We anticipate that the European Central Bank will bring interest rates down to 1.75% by the middle of next year (from 3.25% in October). Lower interest rates ought to create some opportunities in more indebted sectors like telecoms, and in areas that are sensitive to interest rates, like real estate.

We also expect consumer-facing areas — like retailers and travel companies — to be a bit more robust, because they benefit both from interest rates coming down and also from the fact that they’re not exposed to trade concerns and tariffs, because they’re catering to a more domestic consumer in Europe.

Do lower rates also benefit smaller companies rather than bigger ones?

These companies tend to be more indebted, and to have more floating debt. So interest rates coming down would help them a lot. We also expect M&A activity to pick up — we’re already seeing signs of that coming through. That also tends to help the small- and mid-sized companies, because they’re more likely targets of acquisitions.

Given rates coming down and M&A activity picking up, one would expect small- and mid-caps to do well. The only problem is that they are also cyclical — they’re very sensitive to economic growth, which remains very weak. We haven’t made a strong call for mid-caps, but I can certainly see the positive case for them at the moment.

How might exchange rates impact European stocks?

With all other things equal, lower interest rates will push down European currencies. It’s fair to say that the euro has already come down relative to the dollar, reflecting the weaker economic environment in Europe, and the stronger one that we’ve seen in the US recently.

Normally, a falling domestic currency benefits local companies, who often make some of their money outside of Europe in dollars or other currencies, and end up making more money when they convert that back into euros. This is part of the reason why companies aren’t too worried about the decline in currency — because it makes their business more competitive, for one thing.

If the euro is falling, companies with euro-area costs will also see those expenses coming down relative to companies with dollar costs. So from a competitiveness angle, the currency coming down is a good thing.

However, I don’t think it actually benefits equities overall. If you look at periods when the euro has been weak (or when sterling has been weak, in the case of the UK market), they have been associated with weaker equities. And one of the reasons is that equities are a very risk-sensitive asset. Why are currencies coming down? It’s normally either because of a risk event like a sovereign problem (as in the case of France recently), or because people are very worried about economic growth. Neither of those is likely to benefit equities.

A falling euro also discourages foreign investors from buying European equities. US investors are a large player in European stocks, and if they believe that they are going to lose on the currency fallout, then they will be put off from investing more.

In terms of economic performance, which region is most important for European companies: the US, the EU, or China?

We often ask this exact question: What matters more for Europe? We have a weak view on European growth, but we have an above consensus view on the US, and we think that China will see a stimulus that helps growth next year.

Most of European companies’ sales are to Europe. But that component — sales to Europe — hasn’t been growing at all in the last twenty years. All of European companies’ growth has come from sales to China and the US. So Europe is very reliant for its growth on those regions.

We like companies with US exposure for a couple of reasons: one is that they are exposed to a stronger economy, so over time they should get better sales and earnings; another is that they are dollar earners, by definition, and so they should benefit from a stronger dollar; and finally, in Europe, corporate taxes are generally going up, whereas in the US you may even see some taxation benefit.

The fear for these companies is that they may see higher tariffs if they’re exporters from Europe. But in the vast majority of cases, these companies are not exporters, but they have US businesses — with US assets, employees, and sales.

How do you think lower interest rates and inflation will impact European stocks?

Lower interest rates would be the most positive scenario for European companies. They stimulate better economic growth, which feeds through to better earnings. I am skeptical that that will be the case, though. I think the European Central Bank is in a cutting cycle, but a relatively cautious one — reflecting the fact that there are pockets of inflation that still look quite sticky in Europe.

That being said, because we’re below consensus on growth, we think that both growth and inflation will be a bit weaker next year. And lower inflation has historically been associated with higher valuations for the market. This is an upside we’re not totally taking into account in our target prices. We’re saying valuations will remain roughly the same over the next year, but we expect a rise in earnings. But what if we have much lower inflation, and that drives higher valuations?

Valuations can reach as much as 15- or 16-times price divided by earnings, and at the moment we’re only on 13 or 14 for Europe. So we could see a higher valuation for the European equity market, reflective of lower rates and a lower inflation environment. That’s not our core view, but it is an upside risk.

How has the strong performance of US equities impacted European stocks?

The US market has done extremely well over the last year. In fact, it has outperformed relative to Europe over any time period you choose to take, really — the last month, the last three months, the last six months, the last year, and even the last few years. And there have been a lot of fund flows into the US recently, whereas there’s not been very much allocation into Europe.

The question is: Could that reverse? We’ve had an absolutely stellar rally in the US, particularly since the election. And I think the concern is that the US looks vulnerable, given its high valuation. Could that make Europe more interesting? I’m getting a lot more questions about that.

I think Europe is an interesting market, and there are many things that could help it reverse its underperformance versus the US, but none of them are our core view: more significant policy easing, a peace deal in Ukraine, or an improvement in manufacturing in Germany, for example.

The other thing that would help Europe outperform would be something going wrong in the US in some way — either economically or with some of the largest companies. The biggest American technology companies used to be capital-light businesses, but now they’re spending a lot of money on capital investment. If people start questioning the returns on that investment, then the valuations could come down, which could benefit European stocks on a relative basis.

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Korea's financial authorities said on Friday they would loosen foreign exchange regulations and allow more corporate borrowings abroad, in a bid to defend the won that is trading at a 15-year low with improved liquidity.

"Strict regulations restrain the efficiency of foreign exchange management, and there is a need to take into account worsened foreign exchange liquidity conditions after recent events," the finance ministry said in a joint statement with the central bank and regulatory agencies.

The Korean won dropped on Thursday to its weakest level in 15 years, weighed down by risk-averse sentiment after the U.S. Federal Reserve's cautious stance on more interest rate cuts, as well as domestic political uncertainty stoked by President Yoon Suk Yeol's short-lived martial law order on Dec. 3 and his subsequent impeachment.

According to the statement, measures include allowing companies to take out loans in foreign currencies and exchange the funds for the won, if they are used for investing in facilities such as equipment, property and land purchases.

"It is a paradigm shift in foreign exchange policy, from regulating external debt, to inducing more foreign inflows," a finance ministry official told Reuters by phone.

Traumatized by capital flight during the 1997-1998 Asian financial crisis and the 2007-2008 global financial crisis, Korea has had a tight grip on foreign exchange borrowings even as it has encouraged overseas investments.

At the end of September, the country held a record high of a net $977.8 billion in financial assets abroad, after turning a net creditor in 2014.

"We will continue to loosen regulations on capital inflows from the private sector unless it affects external debt or credit ratings in a negative way," the official, who did not wish to be identified because the person was not authorised to speak to media, said.

The ministry also said the ceiling of foreign exchange futures contracts would be raised to 75 percent of capital holdings for local banks and 375 percent for Seoul branches of foreign banks, from the current 50 percent and 250 percent, respectively.

"They are clearly tools for controlling the weakening pace of the local currency by easing the strain in foreign exchange liquidity," said Park Sang-hyun, an economist at iM Securities.

"But, there will be limitations, as unfavourable external conditions, from U.S. policy to China risks, are putting pressure on all emerging currencies, not just the won," Park said.

The ministry said it would implement the measures in a swift manner and consider expanding them after reviewing the effects. (Reuters)

Source: Koreatimes

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Justin

Economic

Forex

The USD/CHF pair holds positive ground around 0.8980 during the early European session on Friday. A hawkish rate cut from the US Federal Reserve (Fed) and stronger US economic data boost the Greenback against the Swiss Franc (CHF). The attention will shift to the release of the US Personal Consumption Expenditures (PCE) Price Index for November, which is due later on Friday.

The US central bank cut the interest rate by 25 basis points (bps) as widely expected. Nonetheless, the Fed signaled a more hawkish stance on its easing cycle next year. The Fed's dot plot, a chart that projects the future path of interest rates, indicated a half-percentage point rate cut in 2025, compared with a full percentage cut projected in September. According to the Summary of Economic Projections (SEP), or “dot plot”," the Fed intends to reduce the number of interest rate cuts next year from four to just two quarter-percent cuts.

The upbeat US economic data released on Thursday has contributed to the USD’s upside. The third estimate reading released by the Bureau of Economic Analysis showed that the US Gross Domestic Product (GDP) grew at a 3.1% annualized rate in the third quarter (GDP), compared to a previous projection of 2.8%. Additionally, the US weekly Initial Jobless Claims declined to 220K in the week ending December 14, compared to the previous week's print of 242K, and came in below the market consensus of 230,000.

On the Swiss front, the Swiss National Bank (SNB) is expected to deliver a further interest rate cut in March 2025 to 0.25% following last week’s 50 bps reduction in the key interest rate. "The SNB softened its forward guidance for possible further cuts. But with the latest move, the SNB likely cemented the market expectations for lower rates," noted Alexander Koch, head of macro and fixed income research at Raiffeisen.

Meanwhile, the ongoing geopolitical tensions in the Middle East and the conflict between Russia and Ukraine could boost the safe haven flows, benefiting the CHF. Israel's military carried out devastating attacks on Houthi targets in Yemen early Thursday, just hours after the Iran-backed terrorist group's latest attack on Israel. Israel's military claimed that the strikes were in retaliation for Houthi missile and drone attacks on Israel over the past year, most of which were intercepted, per CNN.

Source: FXSTREET

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Economic

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, maintains its position near 108.50, the highest level not seen since November 2022. This follows the Federal Reserve's (Fed) hawkish 25 basis point (bps) rate cut on Wednesday, which lowered its benchmark lending rate to a two-year low of 4.25%-4.50%.

The US Dollar strengthened as US Treasury bond yields surged by more than 2.50% on Wednesday, following the Fed's emphasis on exercising caution regarding additional rate cuts. Fed Chair Jerome Powell explained that the central bank would be wary of further cuts, as inflation is expected to remain persistently above the 2% target. As of writing, the 2-year and 10-year yields stand at 4.30% and 4.56%, respectively.

The Fed's monetary policy statement indicated that economic activity remained robust while noting that labor market conditions had softened. The Fed's Summary of Economic Projections (SEP), or "dot-plot," forecasted only two rate cuts in 2025, a reduction from the four cuts projected in September.

In the United States (US), data showed on Thursday that the US Gross Domestic Product (GDP) Annualized reported a 3.1% growth rate in the third quarter, surpassing both market expectations and the previous reading of 2.8%. Additionally, Initial Jobless Claims dropped to 220,000 for the week ending December 13, down from 242,000 in the prior week and below the market forecast of 230,000.

Traders will likely observe key economic figures from the United States including Personal Consumption Expenditures (PCE) and Michigan Consumer Sentiment Index data, scheduled to be released by the US Bureau of Economic Analysis on Friday.

Economic Indicator

Core Personal Consumption Expenditures - Price Index (MoM)

The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The MoM figure compares the prices of goods in the reference month to the previous month.The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

Frequency: Monthly

Consensus: 0.2%

Previous: 0.3%

Source: US Bureau of Economic Analysis

Why it matters to traders?

After publishing the GDP report, the US Bureau of Economic Analysis releases the Personal Consumption Expenditures (PCE) Price Index data alongside the monthly changes in Personal Spending and Personal Income. FOMC policymakers use the annual Core PCE Price Index, which excludes volatile food and energy prices, as their primary gauge of inflation. A stronger-than-expected reading could help the USD outperform its rivals as it would hint at a possible hawkish shift in the Fed’s forward guidance and vice versa.

Source: FXSTREET

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ACY

Economic

Central Bank

The Bank of England (BoE) decided to keep its interest rate at 4.75% during its most recent meeting, a move widely anticipated by markets. However, the real story lies in the voting dynamics of the Monetary Policy Committee (MPC), where a closer-than-expected 6-3 split has revealed an emerging dovish tone within the central bank. This subtle shift could pave the way for a significant policy change in 2025.

The Decision and Its Implications

The BoE’s decision to hold rates reflects a continued commitment to its data-driven approach. Policymakers remain cautious in their forward guidance, emphasizing flexibility and refraining from committing to any specific timeline for future rate cuts. This stance aligns with ongoing inflationary challenges, particularly sticky wage growth and elevated services inflation.

Yet, the three dissenting votes—favouring a 25-basis point cut—signal an internal debate about the appropriateness of the current monetary policy stance. These dissenters, including the recently appointed Alan Taylor, argue that the existing policy risks deviating too far from the BoE’s 2% inflation target and could unnecessarily widen the output gap, potentially stifling economic growth.

A Market Responds

The market reaction was swift. The dovish undertones of the MPC vote prompted a modest repricing of interest rate expectations. The two-year GBP swap curve shifted downward, reflecting increased probabilities of rate cuts as early as February 2025. Currency markets also felt the impact, with the pound losing ground against the dollar, while EUR/GBP showed less pronounced movement due to euro-specific bearish factors.

Bank of England Holds Rates Steady Amid Growing Dovish Momentum_1

This reaction underscores growing market anticipation that the BoE may adopt a more accommodative stance in the coming year, especially as economic data points to slowing activity.

Inflation vs. Growth: A Delicate Balancing Act

The BoE faces a challenging environment where inflation remains stubborn in certain sectors, even as broader economic indicators show signs of softening. Wage growth continues to outpace expectations, adding to inflationary pressures. However, the dissent within the MPC suggests that some members believe the focus should now shift toward preventing economic stagnation and supporting growth.

Bank of England Holds Rates Steady Amid Growing Dovish Momentum_2

This debate reflects a broader dilemma faced by central banks globally: how to strike the right balance between containing inflation and fostering sustainable economic momentum. For the BoE, the growing dovish sentiment may indicate that the pendulum is beginning to swing toward the latter.

What to Expect in 2025

Looking ahead, the BoE’s policy trajectory will remain heavily influenced by incoming data. The MPC’s emerging dovish tone suggests a greater willingness to consider rate cuts next year, particularly if economic activity continues to decelerate. While markets currently expect modest easing of around 55 basis points, some analysts, including ING, predict more substantial cuts totalling 150 basis points in 2025.

This potential policy shift highlights the importance of adaptability in a rapidly changing economic landscape. As the BoE navigates these complexities, its decisions will not only shape the UK’s economic outlook but also influence global financial markets.

The Bank of England’s latest decision may appear unremarkable at first glance, but the close vote and underlying sentiment reveal a central bank at a crossroads. As inflationary pressures persist and economic growth slows, the BoE’s evolving approach will be critical in steering the UK economy through a period of heightened uncertainty. For now, all eyes remain on February’s meeting, where the dovish momentum within the MPC may gain further traction.

To stay updated on all economic events of today, please check out our Economic calendar

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Owen Li

Economic

Commodity

SINGAPORE (Dec 20): Oil prices fell on Friday on worries about demand growth in 2025, especially in top crude importer China, putting global oil benchmarks on track to end the week down nearly 3%.

Brent crude futures fell by 41 cents, or 0.56%, to US$72.47 a barrel by 0420 GMT. US West Texas Intermediate crude futures fell 39 cents, or 0.56%, to US$68.99 per barrel.

Chinese state-owned refiner Sinopec said in its annual energy outlook, released on Thursday, that China's crude imports could peak as soon as 2025 and the country's oil consumption would peak by 2027 as diesel and gasoline demand weaken.

"Benchmark crude prices are in a prolonged consolidation phase as the market head towards the year end weighed by uncertainty in oil demand growth," said Emril Jamil, senior research specialist at LSEG.

He added that Opec+ would require supply discipline to perk up prices and soothe jittery market nerves over continuous revisions of its demand growth outlook. The Organization of the Petroleum Exporting Countries and allies, together called Opec+, recently cut its growth forecast for 2024 global oil demand for a fifth straight month.

Meanwhile, the dollar's climb to a two-year high also weighed on oil prices, after the Federal Reserve flagged it would be cautious about cutting interest rates in 2025.

A stronger dollar makes oil more expensive for holders of other currencies, while a slower pace of rate cuts could dampen economic growth and trim oil demand.

JPMorgan sees the oil market moving from balance in 2024 to a surplus of 1.2 million barrels per day (bpd) in 2025, as the bank forecasts non-Opec+ growth increasing by 1.8 million bpd in 2025 and Opec output remaining at current levels.

In a move that could pare supply, G7 countries are considering ways to tighten the price cap on Russian oil, such as with an outright ban or by lowering the price threshold, Bloomberg reported on Thursday.

Russia has evaded the US$60 per barrel cap imposed in 2022 using its "shadow fleet" of ships, which the EU and Britain have targeted with further sanctions in recent days.

Source: Theedgemarkets

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Pepperstone

Economic

WHERE WE STAND

The post-FOMC yo-yo price action persisted yesterday, as participants continued to digest Powell & Co’s hawkish 25bp cut on Wednesday, though a decent chunk of the market moves seen during the decision itself pared as yesterday progressed.

As so often tends to be the case, markets had shifted to a hawkish extreme amid Powell’s remarks, before then gradually edging back from said extreme as the dust settled, and calmer heads prevailed, yesterday.

This was perhaps most evident in the FX space, where the greenback finding sellers against most G10 peers, seeing the DXY slide back under the 108 handle intraday, while the EUR managed to reclaim $1.04 intraday. Some profit taking in long USD positions isn’t especially surprising here, given the rapid nature of yesterday’s rally, though I, personally, remain a dollar bull, and a firm believer in the case for ‘US exceptionalism’.

We can revisit those in 12 months’ time and see how accurate they prove to be, or whether a ‘black swan’ event throws a spanner in the works.

Back to yesterday, and there were plenty of catalysts for participants to digest.

A dovish hold from the BoJ, with Governor Ueda seemingly in no hurry to deliver another 25bp hike, sparked a sizeable sell-off in the JPY, as USD/JPY climbed north of the 157 handle, with spot briefly trading to its highest since mid-July. The window for the BoJ to hike further is shutting rather rapidly, as policy normalisation progresses elsewhere in G10. Nevertheless, Governor Ueda will be speaking again on Christmas Day (I wish I was joking!), which may perhaps offer greater clarity on the conditions required to unlock another rate hike. Still, as the BoJ turn more dovish, just as Fed Chair Powell releases his inner hawk, further upside in USD/JPY seems plausible.

Thursday also brought the final policy decision of the year from the ‘Old Lady’, with the BoE standing pat, as expected, maintaining Bank Rate at 4.75%. The vote split, though, was considerably tighter than expected, with three of the 9-member MPC (Dhingra, Taylor, and Ramsden) dissenting in favour of a 25bp cut. The quid was, predictably, sold on the back of the dovish vote split, though cable did just about manage to cling onto the $1.26 handle.

My BoE base case remains that 25bp cuts are delivered once per quarter next year, with the next such cut coming in February. Risks to this view, though, are tilted to a more dovish outcome, amid increasing signs of overall economic momentum stalling, and with risks to the labour market tilted to the downside, amid the upcoming changes to National Insurance. Were a greater degree of labour market slack to dramatically reduce overall demand, thus leading to an easing in stubborn services inflation, this could lead to a faster pace of normalisation from the BoE, though firm hints in this direction are unlikely until the second quarter, at the earliest.

We also heard from the Riksbank and the Norges Bank, yesterday, neither of whom delivered any surprises. The Riksbank duly delivered a 25bp cut, as well as gain flagging the likelihood that another such cut will be delivered in the first half of next year. Meanwhile, the Norges Bank held rates steady at 4.50%, while repeating that this cycle’s first cut will most likely come in Q1 25.

LOOK AHEAD

We’ve made it! The final day of the final full working week of 2024 is finally upon us!

A busy-ish economic calendar awaits. Here in the UK, this morning brings the latest retail sales report, with sales set to have risen by 0.5% MoM in November. However, the ONS’ reference period for the figure likely fell before the majority of ‘Black Friday’ discounting begun, which may pose some downside risk to consensus expectations. The latest public sector borrowing figures are also due, and will be of particular interest given the perilous fiscal backdrop, especially after the 10-year Gilt yield rose to a fresh post-Budget high north of 4.60% yesterday.

Elsewhere, the stateside calendar sees the latest PCE inflation figures scheduled. Chair Powell, helpfully, informed us at Wednesday’s press conference that headline PCE is set to have risen by 2.5% YoY in November, with the core print having risen 2.8% YoY. Hence, the figures are unlikely to spring much by way of a surprise. The same can be said of the final UMich consumer sentiment print, which is seen unrevised at 74.0.

Once that’s out of the way, we can all go to the pub. A merry Christmas to all!

To stay updated on all economic events of today, please check out our Economic calendar

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Will European Stocks Rally in 2025?

Why did the team downgrade its STOXX 600 target prices for the next year?

What sectors are you optimistic about?

Do lower rates also benefit smaller companies rather than bigger ones?

How might exchange rates impact European stocks?

In terms of economic performance, which region is most important for European companies: the US, the EU, or China?

How do you think lower interest rates and inflation will impact European stocks?

How has the strong performance of US equities impacted European stocks?

Korea To Allow More Company Borrowings Overseas To Boost FX Liquidity

Source: Koreatimes

Usd/chf Gains Ground Above 0.8950 As Traders Brace For Us Pce Data

Source: FXSTREET

US Dollar Index Hovers Near Fresh 25-month Highs, 108.50, PCE Inflation Awaited

Economic Indicator

Why it matters to traders?

Source: FXSTREET

Bank of England Holds Rates Steady Amid Growing Dovish Momentum

The Decision and Its Implications

A Market Responds

Inflation vs. Growth: A Delicate Balancing Act

What to Expect in 2025

Oil Falls On Demand Growth Concerns, Robust Dollar

Source: Theedgemarkets

The Last ‘Proper’ Trading Day Of The Year

WHERE WE STAND

LOOK AHEAD

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