HSBC releases updated second-half forecast for European stocks Author: Investing.com

HSBC has released updated forecasts for European stocks in the second half of 2024, highlighting the importance of earnings growth to maintain positive price momentum amid mixed economic data.

The outlook worsens as earnings growth estimates decline, HSBC says.

HSBC notes that European stocks underperformed global stocks in the first half of 2024, with the European index lagging the FTSE US, Emerging and All World indices by 4.9%, 1.7% and 3.7% respectively.

The forecast indicates that interest rates will most likely decline in the second half of 2024, but the motives behind these rate cuts could significantly impact market returns.

HSBC analysts suggest cyclical sectors, particularly the property market, could benefit from faster-than-expected rate cuts, while the financial sector could suffer if cuts are seen as a response to an economic slowdown rather than a way to tame inflation and drive stable growth.

They note that valuations in the European market have corrected significantly, with a 26% return on earnings growth of just 5.1% this year.

However, HSBC points out that the consensus EPS growth estimate for 2024 has fallen from 5.8% at the start of the year to 4.8% now. This declining momentum for earnings growth makes HSBC cautious about expecting a repeat of the strong price performance from H1 in H2.

In terms of sector preferences, HSBC maintains a mix of cyclical and defensive sectors as overweight, with healthcare and industrials being top picks due to their high growth potential and favourable characteristics in a falling interest rate environment.

In addition, HSBC favors the UK market due to its attractive valuation and relatively stable political landscape, recommending small- and mid-cap stocks over large-cap stocks. On the other hand, France has been downgraded to underweight due to ongoing political uncertainty.

Overall, HSBC sees some potential for improved market performance but emphasises that improving earnings growth is key to maintaining the current momentum in European stock markets.