Goldman Sachs: Global Investors Skeptical of European Stock Rally

Goldman Sachs: Global Investors Skeptical of European Stock Rally

Strategists at Goldman Sachs report that global investors are increasingly skeptical about the sustainability of the European stock market rally, awaiting Germany's commitment to implementing comprehensive fiscal reforms. Sharon Bell and Christian Mueller-Glissmann, prominent strategists at Goldman Sachs, noted that fund managers are concerned about Europe's lagging performance, while artificial intelligence (AI) is boosting the US stock market, and China is outperforming other emerging markets.

Preference for Other Markets Over Europe

"Europe has moved to the bottom of the shopping list because there are so many other regions showing better momentum," Mueller-Glissmann stated. Bell added, "Everyone is skeptical about whether Europe will actually spend this money. There's a strong sense that people want to see it happen themselves, rather than just being told it will."

European vs. US Stock Performance

In the first quarter, the European STOXX 600 index outperformed its US counterpart in dollar terms, driven by Germany's promises to invest hundreds of billions of euros in defense and infrastructure. However, the index has retreated in recent weeks as investors return to US assets due to the resilience of US economic growth and expectations of interest rate cuts by the Federal Reserve. Renewed interest in artificial intelligence is also driving shares of tech giants. The S&P 500 has risen 12% this year to record highs, while the STOXX 600 is up 8.6% and remains below its March peak.

Skepticism Despite Positive Expectations

Despite skepticism surrounding Germany's proposed spending plans, Goldman Sachs strategists see these plans as providing a fiscal anchor that reduces investor concerns about "extreme downside scenarios" in the region. Germany aims to spend hundreds of billions of euros to modernize roads, bridges, and armed forces, which should boost output. However, some investors question when large-scale stimulus promises will translate into corporate profits. Critics also suggest that some of the money may be used as a substitute for state budgets rather than funding additional investments.

Impact of Negative Interest Rates

Mueller-Glissmann pointed out that "Many clients are saying that the likelihood of negative interest rates in Europe over the next decade is very, very low, and that's good for the banks. People recognize that fiscal support is there, but they are unwilling to pay for that bullish scenario."

Growth and Profit Expectations

Bell expects corporate earnings to grow by 4% and 6% in the next two years, supported by improved economic growth. She forecasts that the STOXX 600 will rise by about 5% in the next 12 months.

Conditional Positive Scenario

Bell concluded, "If Europe delivers on three-quarters of its promises, I think the market will perform very well."

Additional Analysis

It is important to note that stock market performance is influenced by multiple factors, including monetary policies, global economic conditions, and geopolitical events. Investors should conduct their own research and consider their risk tolerance before making any investment decisions. Structural reforms in the labor market, streamlining bureaucratic procedures, and enhancing corporate competitiveness could also contribute to improving the economic performance of the European Union.