Weakness in the stock market has been felt around the globe with inflation and central bank tightening. Now, the expectation is that rate hikes will start to dissipate, setting up bullishness in the new year, including the European stock market.
The Euronext 100 IDX is down 7%, the DAX is down 11% and the FTSE 100 has a slight 2% gain for the year. Needless to say, the European markets have had a rough year and it can only get better—at least that’s the hope for European stock market investors.
“High inflation numbers, the war in Ukraine, and tightening of monetary policies by the Bank of England and the ECB are the main reasons behind the decline in European stock markets this year,” a Morningstar assessment of the European markets this year noted.
“At the end of 2021, European equities were trading at 16.2 times expected earnings for the next 12 months, according to Factset, a data provider,” Morningstar noted. “At the end of September 2022, they were trading at 10.9x, and are now trading at 12.4x.”
The assessment noted that while valuation multiples are trending lower, earnings estimates have been revised higher by 17%. A rebound in energy and commodity prices have been a catalyst for these numbers as well as the ability of companies to mute the effects of macroeconomic headwinds.
Bullishness Is Already Evident
Signs of bullishness are also evident in the Direxion Daily FTSE Europe Bull 3X ETF (EURL). The leveraged fund has risen above 40% within the last three months, and has notably pushed higher in the final month of 2022.
With its triple leverage, EURL seeks daily investment results that are equal to 300% of the daily performance of the FTSE Developed Europe All Cap Index. The index itself is a market capitalization-weighted index that is designed to measure the equity market performance of large-, mid-, and small-cap companies in developed markets in Europe.
Heading into 2023, inflation concerns will continue to be under the watchful eyes of the capital markets. The European markets are paying close attention to what’s happening in the U.S. with regard to inflation and how much the U.S. Federal Reserve is tightening or hopefully loosening its monetary policy — it could set the stage on what the European Central Bank (ECB) could do.
“Top of the list is the risk that fiscal support measures will further fan inflationary pressures, pushing the ECB to engage additional monetary policy tightening,” the Financial Times said.
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