European stocks rally to record high as investors move away from US

European stocks have outperformed the US since the start of the year

The Stoxx Europe 600 Index has surged nearly 9% this year, breaking new ground this week above 550 points.

The European stock market’s rally to record highs has caught many strategists by surprise, leaving them racing to catch up and cautious on further gains.

The Stoxx Europe 600 Index has surged nearly 9% this year, breaking new ground this week above 550 points. Investors have been moving faster, as they diversify out of US assets and bet on a ceasefire in Ukraine.

Analysts have been forced to respond as European stocks have been on a roll since the start of the year, outperforming the US. On the macro front, the economy is expected to recover, borrowing costs are coming down, and Germany’s election on Sunday has raised expectations for fiscal stimulus.

Talks over a ceasefire in Ukraine have also lifted the mood. Optimism about earnings, buybacks and upgrades are adding momentum.

The fourth-quarter earnings season has also been beating estimates. That has taken year-on-year growth in earnings to 1%, compared to a 1.3% decline expected pre-season, according to a Bloomberg Intelligence tracker.

Analysts have been busy raising their view on the region’s profits, with a Citigroup gauge of revisions in positive territory since the start of the year.

Tide has turned in Europe

For global investors, the tide has turned in Europe. Bank of America's latest fund manager survey showed long positions on the continent have reached an eight-month high, while the Euro Stoxx benchmark is expected to be the best performing index this year by a plurality of investors.

Europe’s rally has been so strong and the rotation by investors so significant that some strategists like Barclays’s Emmanuel Cau now see the region back at fair value.

The risk from any US tariffs on European exports, and the potential indirect hit from a trade war on global growth, are also still looming.

“To achieve an above-average valuation, we think Europe needs two things to happen: activity data must continue to improve; rates must become lower,” he said.

The European Central Bank is seen cutting interest rates three times by the end of the year, versus just one to two for the Federal Reserve. Such moves would expand a rate differential that makes stocks relatively more appealing in Europe.

Bloomberg