European Stocks Outlook for H2 2024: HSBC’s Insights on Earnings Growth, Interest Rates, and Sector Performance
HSBC has provided its updated perspective on European stocks for the second half of 2024, emphasizing the critical role of earnings growth in sustaining positive price momentum amid varied economic data.
Key Highlights from HSBC's Updated Outlook:
- Declining Earnings Growth Estimates: HSBC reports a deteriorating outlook as earnings growth estimates for European stocks continue to decline.
- Underperformance in H1 2024: European equities have lagged behind their global counterparts, with the Europe index trailing the FTSE US, Emerging, and All World indices by 4.9%, 1.7%, and 3.7%, respectively.
- Potential Interest Rate Cuts: HSBC predicts interest rates are likely to decrease in H2 2024, but the reasons behind these cuts could significantly impact market returns.
- Sector Analysis:
- Cyclical Sectors: Real Estate may benefit from quicker-than-expected rate cuts.
- Financials: Could suffer if rate cuts are seen as a reaction to economic slowing rather than cooling inflation and resilient growth.
- Valuation Re-Ratings: European market valuations have increased sharply, showing a 26% return against a modest earnings growth of 5.1% this year.
- Decreasing EPS Growth Estimates: The consensus for 2024 EPS growth has reduced from 5.8% at the beginning of the year to 4.8% now. This decline in earnings growth momentum has led HSBC to caution against expecting a repeat of the robust H1 performance in H2.
- Sector Preferences:
- Overweight Sectors: Healthcare and Industrials are favored due to their high growth potential and stability in a falling interest rate environment.
- Geographical Preferences:
- UK Market: Favored for its attractive valuation and relatively stable political landscape, with a recommendation for small- and mid-cap stocks over large-cap ones.
- France: Downgraded to underweight due to ongoing political uncertainty.
Conclusion and Analysis
HSBC’s analysis underscores the necessity for improved earnings growth to sustain the current momentum in European equities. The declining earnings growth estimates and potential interest rate cuts present a mixed outlook, suggesting cautious optimism.
Breakdown for Easy Understanding:
- Earnings Growth: Companies need to make more profit to keep stock prices rising. HSBC sees this as slowing down, which could be bad for stock prices.
- Interest Rates: Lower interest rates can be good for some stocks but bad for others, depending on why the rates are lowered (to help a struggling economy or to control inflation).
- Sector Focus: Real Estate might do well if rates drop quickly, but banks might struggle if the economy is weakening.
- Market Valuation: European stocks have gotten more expensive without a big increase in profits, which could be risky.
- Geographical Picks: HSBC likes UK stocks more than French stocks right now, especially smaller companies in the UK.
In essence, while there are opportunities, especially in sectors like Healthcare and Industrials and regions like the UK, the overall message is to be cautious and watch for earnings growth as a key indicator for future stock performance.