European Growth Targets Cut on Ukraine Conflict

Russia’s invasion of Ukraine this week has prompted global banks to cut their forecasts for European equities for this year.  Many analysts had initially expected European stocks to extend their post-pandemic rally and outperform U.S. stocks amid a global rotation to cheaper, value stocks. However, the Ukraine conflict has changed their views.

Bank of America and Goldman Sachs cut their 2022 targets for the Europe Stoxx 600.  Bank of America lowered its target for the Stoxx 600 to 410 from 430, implying a further -6.6% drop from Thursday’s close.  Goldman Sachs cut its Stoxx 600 target to 490 from 530 and lowered its price target on the blue-chip Euro Stoxx 50 ($STXE) index to 4,300 from 4,800.

The move by Bank of America to cut its European stock targets reflects increased risks from the conflict in Ukraine.  BOA said that the “shock from spiking energy prices” could lower Eurozone growth by 0.50 percentage points.  In addition, Philip Lane, the chief economist of the ECB, said today that Russia’s invasion of Ukraine might reduce Eurozone GDP this year by 0.30 to 0.40 percentage points. 

The downgrades highlight the changing fortunes for European equities.  At the beginning of the year, many global strategists had expected European stocks to outperform U.S equities on concerns that monetary policy tightening by the Fed will hurt expensive U.S. technology companies the most.  Goldman Sachs had already lowered its forecast for the S&P 500 ($SPX) (SPY) this year to 4,900 from 5,100, citing the prospect of more aggressive Fed monetary tightening to weigh on valuations.

On the positive side, Goldman Sachs raised its forecast today for the UK’s FTSE 100 index to 8,100 from 7,900, saying the UK large-cap index “has proven more resilient both to rate rises and concerns about escalating energy costs.  The FTSE 100 index has almost no technology exposure and has a heavy-weight in value stocks and financials.”