Prefer cheaper European stocks to US equities: Citigroup strategists

European stocks are better prepared than their pricey US peers for the slide in earnings that’s set to take place this year, according Citigroup strategists.

A team led by Robert Buckland raised European equities to ‘overweight’ on Friday, saying valuations already discount a 15 per cent drop in earnings. At the same time, they cut US shares to ‘underweight’ on the grounds that earnings expectations are still too optimistic. Citi’s view adds to growing optimism toward European stocks, which had their biggest outperformance on record versus the US in the fourth quarter following years in the doldrums. With recession now also looming in America, investors are turning their back on expensive mega caps and focusing on Europe’s cheap valuations. The Stoxx 600 Index trades at about 12.2 times forward earnings compared with the S&P 500’s 16.6 times.

In the US, “recession reality approaches,” the Citi strategists wrote in a note. “We expect a weaker first half, and a stronger second half.” They forecast the S&P 500 will end 2023 at 4,000 points, implying about 5 per cent upside from current levels, while predicting an 8 per cent rise in the Stoxx 600 to 475 points. Separately, Goldman Sachs Group Inc. strategists led by Sharon Bell raised their 12-month price target on the Stoxx 600 to 465 points

The strategists expect global earnings to contract by 5 per cent to 10 per cent this year, as opposed to current analyst expectations for 3 per cent growth, Buckland wrote. A Citi index shows analysts are already starting to moderate their expectations, with downgrades outpacing upgrades in both Europe and the US.