It’s too early go long euro-area stocks versus US peers again, according to JPMorgan Chase & Co. strategists.
(Bloomberg) — It’s too early go long euro-area stocks versus US peers again, according to JPMorgan Chase & Co. strategists.
“We believe there is another leg of underperformance ahead,” strategists led by Mislav Matejka wrote in a note on Monday, keeping an underweight view on euro-zone equities.
The strategists expect further weakness ahead in the region, citing a worsening “growth-policy trade-off” in the second half “due to likely continued central bank tightening on one side, and M1 money supply pointing to more activity disappointments ahead on the other.”
After a 36% outperformance in dollar terms between October and April, euro-area stocks retraced more than a third on a relative basis, mostly due to the strength in US equity markets that were spurred by AI hype and the surge of megacaps. They then bounced back in July, helped by dollar weakness.
The JPMorgan strategists cut euro-area equities to underweight in May after their strong run, during which the they were overweight against US peers, a call that proved correct. However, their view that the first quarter would be the market’s peak for 2023 didn’t materialize as stocks rallied through the first half.
For Matejka and his team, the next leg down could be driven by lower bond yields, as well as earnings disappointments. They see earnings downgrades ahead given economic surveys such as the Purchasing Manager Index are in contraction territory, even if some economic data improves.
The weakening Chinese economy and stimulus disappointments are likely to be another drag for Europe, the strategists said. Indeed, European stocks declined on Monday, with luxury-goods makers taking a hit after another round of weak data fueled concerns about the recovery in China.
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