We sat down with Goldman Sachs Research senior strategist Sharon Bell to discuss the Europe equity strategy team’s outlook for stocks in 2025.
Why did the team downgrade its STOXX 600 target prices for the next year?
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.
How might exchange rates impact European stocks?
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.
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?
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 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.
