Deutsche Bank cuts outlook on European stocks amid uncertainty on interest rates



Strategists at Deutsche Bank downgraded European stocks to neutral Monday, citing “muted” upside for stocks over the coming weeks and uncertainty on major central banks’ monetary-policy outlook amid a shaky start to 2024 for the financial markets.

“We expect markets to go mostly sideways with a mild setback of not more than 5% from current levels, predominantly in parts of the market that have seen the biggest inflows in the fourth quarter of last year,” said Deutsche Bank strategists led by Maximilian Uleer, head of European equity and cross-asset strategy, in a Monday note. 

The bank in October gave an overweight rating to European equities going into 2024 as rising government bond yields and disappointing corporate-earnings reports kept stocks under pressure, suggesting upside ahead for equities. European stocks then rallied into the end of 2023, fueled by growing optimism that European central banks and the Federal Reserve will cut interest rates earlier and faster than the markets had previously anticipated. 

“We continue to believe that the ECB and the Fed will cut faster and further than the market is currently pricing in,” UIeer and his team wrote Monday. “However, we expect this to become apparent later this year, once central banks start to openly communicate planned cuts.”

In turn, a relentless year-end rally has now left limited upside for the stock market in early 2024, according to Deutsche Bank strategists. “Investor positioning in equities has increased substantially, and positive economic surprises have become fewer, especially in the U.S.,” they wrote. 

See: Why stock-market investors will remain at mercy of shifting rate-cut expectations after wobbly start to 2024

Despite the downgrade, the bank’s strategists remain bullish on European stocks throughout 2024, as increased investor positioning does not appear to be in the overbought territory.

Uleer and his team said Monday that a short-term pullback in European stocks seems likely. But with potentially steady economic growth in China and a reacceleration of growth in the U.S. and Europe in the second half of 2024, corporate earnings may grow by 5% and price-to-earnings multiples may expand by 0.5 points. That implies an upside of around 8% for European stocks in 2024, they noted.

European shares on Friday capped their first weekly loss in eight weeks, as investors digested a strong U.S. jobs report which suggested no pressing need for the Fed to cut interest rates as the markets expected. The STOXX 600 index
eked out a modest gain of 0.4% on Monday.  

In the U.S. market, Deutsche Bank is the most bullish among Wall Street’s 2024 forecasts for the S&P 500
with a call for the benchmark index to reach 5,100 by the end of the year. That would represent a roughly 7.8% advance from Monday afternoon’s level of 4,732, according to FactSet data.

U.S. stocks were mostly higher on Monday as Wall Street looked to recover after snapping a nine-week winning streak on Friday. The Nasdaq Composite
was up 1.5%, to 14,746, while the Dow Jones Industrial Average
was nearly flat at 37,459, according to FactSet data.

See: UBS joins Wall Street strategists calling for new S&P 500 record in 2024


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