Investing.com — Strategists at anticipate a tactical pause to the recent rebound in European equities, as markets wait for clarity on the Strait of Hormuz and attention shifts to company-level earnings.
The Wall Street bank flipped back to a constructive medium-term stance on European stocks earlier this month as the first signs of de-escalation emerged in the Middle East. But while they stay bullish in the medium term, the strategists think that “investor sentiment has come a long way.”
The de-escalation rally started with quality growth sectors and more recently broadened to momentum laggards, a pattern Morgan Stanley describes as a late-stage tactical signal.
At the same time, the EU Cyclicals vs Defensives ratio has already recovered 80% of its losses since the start of the year, largely unwinding not just Iran-related but also AI-related disruption rotations.
“We continue to expect a resolution to Middle East disruptions but reiterate that the reopening of the Strait may take time,” a team led by Marina Zavolock wrote.
Contrary to a common investor view, European consensus earnings growth is moving up rather than down amid the Middle East disruptions. Morgan Stanley estimates that a $90 per barrel oil price equates to around 10% European EPS growth, roughly 70% of which is driven by the Energy sector — a dynamic similar to 2022.
The S&P 500 has returned to all-time highs, while the and MSCI Europe remain 3-4% off their peaks, reflecting the market’s view that Europe lags the U.S. due to higher energy dependency and lower technology exposure.
Morgan Stanley strategists push back on this, arguing the near-term index choppiness has “more to do with sentiment than earnings.”
The bank expects stock-level dispersion to rise well above seasonal averages, driving a shift back toward bottom-up fundamentals from rotational squeezes, with a rebalancing toward defensive sectors.
Also, it sees the biggest skew to beats in Energy, Utilities, Banks and Telecoms, and the biggest skew to misses in Luxury, Autos and Staples.