LONDON, Jan 6 (Reuters) - European earnings could see their best period of earnings growth since the global financial crisis, strategists at Bank of America-Merrill Lynch said on Friday, raising their year-end targets for the region’s benchmark equity index.
Strategists at Bank of America raised their forecast for European earnings growth to 11 percent for 2017 and to 8 percent for 2018.
Double-digit earnings growth would mark something of an inflection point for Europe, which has suffered persistently sluggish corporate earnings growth for the last 5 years, a key reason for underperformance for the region’s equity markets.
Bank of America strategists, led by James Barty, said a better economic growth, a weaker euro and expectations of strong commodity prices were key reasons underpinning their views.
“While U.S. earnings have recovered, European earnings have stagnated. So to see European equity markets significantly higher from here, we have to believe in higher earnings,” strategists at Bank of America said in a note.
They also expect the pan-European STOXX 600 index to reach 390 points by the end of 2017, though warned that returns were “frontloaded.”
The STOXX 600 index ended 2016 around 1.2 percent lower, but rallied about 18 percent in the second half of the year.
“The strong year-end rally in equity markets means our 2017 target was reached at the end of 2016,” the strategists wrote, adding that valuations, running in line with the average over the past three decades, leave little scope for a major move higher from current levels.
European stocks trade at about 15 times forward earnings, according to Thomson Reuters data.
On a sector level, Bank of America are “overweight” oil & gas and media, and see value in pharma and utilities. They are underweight UK-exposed retail and travel & leisure stocks. (Reporting by Kit Rees, Editing by Vikram Subhedar)