Investment banks are bearish about European stocks because of a rapid deterioration in economic data. Strategists at UBS expect the Stoxx Europe 600 index to decline by 12.5% to 410 by the end of the year from its current level of 468. And Bank of America’s strategists are forecasting an even steeper decline of 18.8% to 380 for the index by the first quarter of next year. Why will stocks tumble? A significant factor behind the poor sentiment is the worsening outlook for new orders in many of Europe’s service sectors, according to Gerry Fowler, head of European equity strategy at UBS. .STOXX 1Y line “The ‘new orders’ outlook for many of the service sectors in Europe seems to have deteriorated quite rapidly. It was quite firm in May, and for three months in a row, we’ve seen service sector new order weakness,” Fowler told CNBC’s ” Squawk Box Europe “. In July, the flash Composite Purchasing Managers’ Index (PMI) for the euro area fell to 48.9, down from June’s 49.9 — below the 50 mark that separates growth from contraction. The decline was also widespread, with Germany and France, the two largest economies in the euro zone, both experiencing contraction. Yet, stock markets in the continent have continued to hold up so far. “We’ve been in a range of 440-450, up to 470, where we are at the moment, for month after month after month,” Fowler said. The stock market has been range-bound, according to him, due to the disparity between the services and manufacturing sectors in Europe. Even as manufacturing sector activity declined in the euro zone, growth in the bloc’s dominant services industry kept stocks afloat. However, Fowler said, cracks have begun to show. The strategist highlighted that although first-quarter earnings reported in April were quite robust, the second quarter has shown signs of weakness. “The beats are the lowest we’ve seen since before Covid,” he said, suggesting a gradual weakening of the health of companies in Europe. A bigger decline Bank of America supports Fowler’s analysis. The Wall Street bank’s strategists noted that the global growth acceleration behind the recent rally in European stocks appears to be fading. “Given that monetary policy works with a lag, the impact of the most aggressive monetary tightening cycle in four decades is only just now starting to show up in the data,” said BofA strategists led by Sebastian Raedler in a note to clients on July 28. The bank’s strategists expect an 18% decline for the Stoxx Europe 600 index to 380 by the first quarter of next year — if global PMIs continue to decline as expected. Opportunities in a bleak market Despite the bleak outlook for the market, UBS’ Fowler sees some opportunities. “We do still like some of the cyclical sectors, particularly banks. We also like real estate, which was one of the least preferred sectors for us all the way through till May, but from May it really started looking like it was dropping and potentially rebounding,” Fowler added.
