Euro Stoxx 50: 4,000 points feasible by the end of the year

Summary:

» Corporate profits should increase by 10% in 2018 and again in 2019

» Index valuation is attractive – P/E-2019 is 12.6, dividend yield belongs to the highest among the world’s established indices

» Euro Stoxx 50 expected to reach 4,000 points by the end of the year

In the past few years the share-price performance of the Euro Stoxx 50 companies has failed to keep up with the performance of the big American indices and with that of the DAX. In Europe crises have been a curb on the performance in the past, while in the USA, for example, buoyant share prices at many technology and financial stocks have generated a boom.

In the meantime, the outlook for the European bellwether index has improved significantly. The euro-area’s economy is in good shape again today and even the notoriously sluggishly-growing economies of Italy and Greece are expanding. The political situation within Europe has also clearly stabilized in the wake of the positive – from the market’s point of view – election outcomes in 2017 (including in the Netherlands and France). The upcoming election in Italy is unlikely to change this positive overall picture much.

Nor are we too concerned about possible repercussions from the euro’s firmness on corporate profits. Admittedly, this could squeeze profit margins slightly, but looking forward there still appears to be enough fuel for corporate profits to rise. We also estimate that the euro is unlikely to appreciate much further this year.

The analysts expect the Euro Stoxx 50 companies will see earnings grow by around ten per cent this year and next year. These growth rates look feasible given that the economy is doing so well. Worthy of note is the fact that the earnings upswing is very broad based and even those companies that come from sectors that have recently been growing sluggishly such as insurance companies and utilities should report significant earnings growth in 2018/19.

On the basis of forecast earnings for 2019 the Euro Stoxx 50 is valued at a price earnings ratio of 12.6. The dividend yield of 3.8% (related to dividends for 2018) also belongs to the highest among the world’s established indices.

We expect that the Euro Stoxx 50 will climb to 3,950 by mid-year and to 4,000 by the end of the year. However, despite good fundamental data, share-price fluctuations in the equity markets are likely to increase in the future compared to the previous year, partly because market players will repeatedly call into question the prevalent view. But there is no reason to forecast a crash.

 

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