By Sagarika Jaisinghani, Bloomberg Markets Live analyst and reporter
What’s already been one of the worst years on record for European stocks may not be done yet.
The impact of the region’s energy crunch is worsening, adding to the high inflation and hawkish monetary policy that’s erased $4.1 trillion from the market capitalization of Stoxx 600 companies this year. The European Central Bank raising interest rates by the most on record only adds to the melting pot.
“With a recession hurtling toward us like a riderless horse, it’s clear markets could fall much further,” says Danni Hewson, a financial analyst at AJ Bell.
According to Hewson, the “big test” will be next month’s earnings season, when companies update shareholders “on how they’ve been able to navigate the current inflationary storm and how demand has been holding up.”
Amundi, Europe’s largest asset manager, is the latest to say it’s time to cut equity exposure and turn more defensive. Its call echoes the views of BlackRock and Morgan Stanley, where strategists have warned of further downside for stocks.
Earnings estimates are another reason for caution. A resilient second-quarter results season had sparked wagers that profits would hold up through the year, but Citi strategists this week forecast a slew of downgrades ahead.
Some technical indicators also suggest regional equities haven’t seen a bottom yet. Valuations have fallen below their long-term average, but they’re still above levels of past downturns. Morgan Stanley strategist Graham Secker says the forward 12-month price-to-earnings ratio for European stocks could fall another 15% from current levels.
The share of Stoxx 600 companies hitting 52-week lows also shows the stress in investor positioning. Although this year’s selloff hasn’t matched the panic seen in 2020 or at the height of the global financial crisis, the rout has been more prolonged than seen in the past few downturns.
Until now, rising energy stocks have provided a prop to the European benchmark, but even that may now be in question. With oil prices coming off highs of earlier this year, there’s growing concern that an economic slowdown will put a brake on demand for the commodity.