(Bloomberg) -- Strategists have cooled on the prospects for further gains in European stocks as investors are piling on.
Even as the benchmark Stoxx Europe 600 Index has rallied toward its best May performance since 2009, their year-end forecasts for regional equity gauges are below stocks’ current levels.
While a victory by centrist Emmanuel Macron in the French presidential election spurred a record inflow into equity funds, forecasters now see fewer triggers for further gains, with analysts suggesting that prospects for better profits are largely priced in. The Stoxx 600 has risen 9.5 percent this year through Friday, and last week climbed to its highest level in 21 months.
The Euro Stoxx 50 Index of the biggest euro-area stocks will finish the year at 3,498, 3.8 percent lower than Friday’s close, according to the average in a survey of 15 banks compiled by Bloomberg. For the Stoxx 600, nine banks expect the gauge to end the year 2.4 percent lower than Friday’s level, a mean of their predictions shows.
Equity strategists, “having been torched for their prior optimism in the past, might be cautious in continuing to call Europe up after a very good run,” said Michael Ingram, a market strategist at BGC Partners in London. “It’s difficult to identify any near-term catalysts for continued outperformance as most of the political tripwires appear to have been negotiated, easy monetary policy is priced in and the European earnings season is essentially done.”
The Stoxx 600 climbed 4.3 percent and the Euro Stoxx 50 surged 6.4 percent between the two votes, as investors priced in a win for Macron. Six of the 15 banks surveyed shared their estimates after the second-round vote in France. The rest gave them a few days before, during which polls were consistently predicting pro-euro Macron would win by a landslide.
Investors are undeterred by strategists’ lack of enthusiasm. They are pouring money into European equity funds, which saw record inflows of $6.1 billion in the week to May 10, according to a Bank of America Merrill Lynch note citing EPFR Global data. The Stoxx 600 has gained amid the best earnings season in almost seven years and an improving euro-zone economy.
Yet the rally has shown some signs of overheating. The benchmark’s relative strength index hit its highest level in two years before dipping back below 70 last week. That’s the threshold above which technical analysts deem shares “overbought.”
The upside from easing political stress has largely played out for euro-area equities, JPMorgan Chase & Co. strategists including Mislav Matejka and Emmanuel Cau wrote in a note Monday, noting that “equities might be peaking.” Flows into exchange-traded funds have tended to lag market performance, not lead it, they said.
“There is definitely scope for moderation from current levels,” said Ken Odeluga, a market analyst at City Index in London, who expects the Stoxx 600 to end the year at around 370, compared with Friday’s closing of 395.63. “We may get a bit of caution as the year progresses, as investors still have politics in Germany and Italy to contend with,” he said, referring to elections in those countries.