Europe's Stock Party May Have Ended Before Draghi Can Save It

(Bloomberg) -- Looser monetary policy may not be enough to keep Europe’s equity market afloat.

That’s according to the latest poll of Bloomberg strategists, who projected an average drop of 6% in the Stoxx Europe 600 to 363 points, by the end of this year. The Euro Stoxx 50 is expected to fall by the same magnitude to end 2019 at 3,280.

It’s been said often enough. Expectations of lower interest rates drive funds into stocks and buoy equity valuations -- that’s partly why the S&P 500 is near a record high and why European shares had their best first-half of the year in two decades.

But in a market where corporations are grappling with structural threats, slowing economic growth and unresolved trade conflicts, central bank support might not be enough.

The European market’s valuation gains this year already mark “a significant move given earnings estimates are coming under pressure and the profit warnings are coming thick and fast,” said David Holohan, head of equity strategy at Mediolanum Asset Management, which didn’t participate in the survey. “While a dovish Fed likely helps sentiment toward U.S. equities, the ECB has remained dovish and interest rates never moved up to the degree they did in the U.S., so the impact should be more muted.”

Just take this week’s corporate headlines: Deutsche Bank AG’s slide despite its radical restructuring underscored the challenge of surmounting low rates and growth for financial stocks, the region’s largest sector. The woes of BASF SE, the world’s largest chemicals maker, pointed to the threat of the ongoing U.S.-China trade conflict. Even German stalwart Daimler AG issued a profit warning Friday, its fourth in just over a year.

With both the U.S. and European central banks inching closer to monetary easing this week, the Stoxx Europe 600 dropped, while the U.S. benchmark notched a new all-time high. The contrast is clear.

(For a table on the Stoxx 600 and Euro Stoxx 50 surveys, click here; here for the DAX; here for the FTSE 100.)

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon, Monica Houston-Waesch

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