Citigroup strategists who were accurately bullish on European stocks a year ago are now sounding a profit alarm

The Zhitong Finance App learned that a year ago, Beata Manthey, head of Citigroup's European stock strategy, was one of the few investors optimistic about the European stock market. Now, at a time when European stocks are about to achieve their best performance in four years, the strategist warns that the further rise in European stocks depends on whether profit expectations can maintain a delicate balance. She said that the future rise in the stock market may be threatened by unstable profit prospects. She believes that the current market pricing is too idealistic, and if the company fails to meet profit expectations, it may cause the stock price to be revised downward.

Manthey pointed out that the European Stoxx 600 index has risen 14% this year and is currently 581 points, which has increased the valuation. This means there is little room for error in terms of corporate profits, and she expects corporate profits to grow 8% next year.

The European stock market is following its biggest increase since 2021, thanks to Germany's massive spending reforms and strong economic prospects. The region's relatively low investment in artificial intelligence also makes it attractive in the current situation where market concerns about a possible tech bubble in the US are growing.

This raised the European stock market's benchmark price-earnings ratio to 15 times, slightly higher than the average of 14 times over the past five years. However, the outlook for next year remains positive. According to data, analysts expect the profits of European Stoxx 600 companies to increase 11% in 2026, thereby narrowing the gap with the profits of S&P 500 companies. Previously, European stocks had outperformed US stocks since 2023.

Market strategists expect European stocks to rise further. Deutsche Bank and UBS teams are the most optimistic. Their target level for the European Stoxx 600 Index by the end of 2026 is 650 points — which means a 12% increase from Thursday's closing price.

Manthey also held a bullish view and gave a target price of 640 points. This potential increase is mainly due to industries that are more affected by the economic cycle, such as industry, mining, and banking. On the other hand, she downgraded her views on tech stocks to neutral.

She anticipates that European exporters' competitiveness will increase as the exchange rate of the euro against the US dollar falls slightly. However, the group's performance this year was lower than that of domestic companies, as a strong currency weakened the value of their international business.

However, Manthey said European stocks are more difficult to accept now because they are more expensive. This is in stark contrast to her views in October 2024, when she was one of the first to upgrade the region's stock ratings to “increase holdings,” and investors were shunning the region at a time.

“It was clear last year that Europe is an ideal place for investors to invest,” she said. Now that valuations have risen, there are other markets that are also attractive from a cyclical perspective.”