Goldman Sachs, a top investment bank The group's strategists said European stocks are poised for a boost this year as investors seek to diversify their over-reliance on the U.S. market and its overvalued tech stocks.
Goldman Sachs' team, including Sharon Bell and Peter Oppenheimer, raised its year-end target for the pan-European Stoxx 600 index to 625 points, about 4% higher than the record closing high reached this Monday, while the average target price of its peers is around 620 points.
The previous day, the pan-European STOXX 600 index rose 0.94% to close at 601.76 points, a new record high. As of press time, the index was up slightly by 0.1% at 602.77 points.
Goldman Sachs strategists wrote in a report: "Given the high valuations and concentration in the U.S. market, we recommend that investors diversify their asset allocation."
They also mentioned that U.S. investors, worried about the risks posed by a weakening dollar, are seeking alternative sources of growth in other parts of the world.
Although European stocks are not the most undervalued – their forward price-to-earnings ratio is currently over 15, it is still significantly lower than the S&P 500's approximately 22.
Strategists say that a valuation discount of about 30%, coupled with expectations of an improving European economy, could drive capital inflows into the region.
Goldman Sachs' Bell wrote, "Valuations alone are not enough; we have found that U.S. investor inflows into Europe are closely linked to economic growth signals." She added that her team believes European growth momentum is picking up.
Prior to this, both the pan-European STOXX 600 index and the S&P 500 index had experienced three consecutive years of gains.
However, it should be noted that the growth in the European market in 2025 will be mainly driven by banks. Driven by stocks in the defense sector, US stocks repeatedly hit record highs, fueled by a surge in technology stocks—a sector that accounts for a relatively small share of the European market.
Goldman Sachs strategists point out that European equity positions remain light, as 2025 is only a year for tentative buying after continuous net selling from 2022 to 2024.
The team also stated that this year will be a strong one for European small-cap stocks. This sector is expected to benefit from stronger economic growth, a stable interest rate environment, increased M&A activity, a stronger euro, and lower oil prices.
(Article source: CLS)
