LONDON (Reuters) - Bank of America Merrill Lynch and Morgan Stanley joined a chorus of optimism on European equities on Friday, pointing to the strong recovery in corporate profits that is spurring fund inflows into the region.
Both brokers predict double-digit growth for European earnings as the regional economy springs back to life after years of sluggish activity.
Global sentiment on equities has wavered in recent weeks as economic data from the United States shows signs of softening, though brokers say earnings are a more important factor for stock investors.
“The hard data for equities is earnings - and they are powering ahead. Q1 earnings season is very strong and revisions trends are positive and broad based,” said analysts at BAML in a note to clients.
U.S. economic growth in the first quarter was the slowest since 2014, data on Friday showed, though stocks shrugged off the numbers.
BAML expects European earnings to grow 15 percent in 2017, up from its previous prediction of 11 percent. It now forecasts the STOXX 600 index to rise to 420, more than 8 percent above current levels.
In the past week, $2.4 billion (1.87 billion pounds) was pumped into European equity funds, the highest since December 2015, BAML said, as more money that left the region last year returned.
Fading political risks after the first round of the French presidential election and the return of investor inflows are likely to underpin valuations that are still running about 10 percent below the peaks seen two years ago, BAML said.
Overall, European earnings are forecast to grow more than 12 percent over the next year, according to Thomson Reuters data.
“If earnings surprise to the upside relative to consensus, it would go a long way towards addressing some concerns around ‘hard’ data,” Morgan Stanley strategists said.
The two brokers added to a string of bullish calls on equities in Europe, a region which has seen earnings disappointment and political risk dampen appetite for its stocks.
Strategists at Deutsche Bank, who also see earnings in Europe rising 10 percent this year, struck a more cautious note.
European equities are already priced for a ‘goldilocks’ scenario of strong growth, low interest rates and diminishing uncertainty, leaving little scope for disappointments, Deutsche strategists said.
The recent pullback in commodity prices, particularly metals, suggests the resources sector .SXPP, which has contributed significantly to the rebound in earnings forecasts, could come under pressure, Deutsche said.
That puts the European broker at odds with BAML who upgraded their stance on resources shares to “overweight” on the view that the global reflation trade has more room to run and recent weakness was, in fact, an opportunity for investors.
Morgan Stanley includes banks and energy stocks among its most favoured sectors in Europe.
Reporting by Kit Rees, Editing by Vikram Subhedar and Toby Chopra