Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange July 22.STAFF/Reuters
The ceiling for European stocks is fast approaching after the steepest rally in 3 1/2 years, if strategists are to be believed.
Equities in the region rose more than 8 per cent since a July low through Tuesday, including the longest streak of gains in 15 months. The increase left the Stoxx Europe 600 Index 4.8 percent away from the average year-end forecast of 10 banks tracked by Bloomberg. The benchmark gauge dropped 0.6 per cent at the close of trading.
While European stocks almost entered a correction earlier this month amid anxiety over Greece, they rebounded as those worries faded and investors bullish on the region's economic and earnings outlook piled back in. The Stoxx 600, 2.8 percent from its April record on Tuesday, already reflects most of the optimism, according to Dirk Thiels at KBC Asset Management.
"A very good earnings season could push us a little higher, but I'm sure most of us would be pretty happy to end the year at these levels," said Thiels, KBC's head of investment management in Brussels. "We could have added to our positions when the market corrected but we missed the boat and stocks are not cheap anymore."
The Stoxx 600 climbed 18 per cent this year through Tuesday, taking its valuation to 16.9 times the projected earnings of its members, up from 15.7 times on July 7. While gains earlier this year saw strategists scrambling to catch up, they have stuck to their guns this time around. A fifth of the forecasters now call for a drop from current levels, while Citigroup Inc., which had predicted the biggest annual rally a month ago, has moderated its estimate.
UBS Group AG's Ramin Nakisa is among the more bullish strategists, estimating the Stoxx 600 will end the year at 440, or 9.3 per cent higher. If realized, that will be the best year for European stocks since 1999, helped by the biggest first- \quarter rally in 17 years.
"Earnings will ultimately drive this rally," Nakisa, UBS's global asset allocation strategist, said by phone from London. "We have a fantastic macro backdrop, improving margins, a very favorable currency story, and accommodative central banks. Having a bullish view will pay off very well. The market has by no means priced that in yet."
The euro has resumed losses this month, boosting prospects for profits earned overseas, while the region's economic data are improving. European companies are predicted to increase profits by 6.7 per cent this year, five times greater than for U.S. counterparts.
Still, Richard Turnill at BlackRock Inc. says returns may be leveling out as bull markets around the world, including Europe, mature. U.S. equities are estimated to rise 5.3 per cent this year, and Japan's Topix index, 3.4 per cent on average, according to the most recent data compiled by Bloomberg.
"The bull-market environment has changed materially," Turnill, chief investment strategist for BlackRock's Alpha Strategies group, said at a presentation in London last week. "Single-digit returns and higher volatility will be more normal. We're going to have to get used to lower returns."