European Stocks Hit New Highs: Can the Rally Continue?

Europe's leading blue-chip stock market index reached new record highs due to growing investor confidence indicating the region has moved past the most challenging parts of the downturn. ​

The Recovering Man of Europe

The Eurostocks 50 has risen 10% over the past five weeks, while the German DAX index has helped propel the broader Eurostocks 600 to a new record high. European indices do not have an equivalent to the "Magnificent Seven" stocks that have supported American indices. Still, they appear to respond to a similar dynamic: strong earnings from technology stocks such as ASML and SAP have helped push prices higher. The Eurostocks 50 index is now only 15% below its all-time peak of 2000.

The outsized performance of the European index relies on German stocks continuing their upward trend as data has improved. The latest all-time high for the DAX came following GfK's consumer sentiment survey showing an improvement, albeit remaining negative. Germany's economic data has provided a mixed picture after the Manufacturing PMI hit a four-month low, but the improvement in the Services component cheered investors. Attention is thus turning to upcoming key data that could either solidify or reverse the trend, depending on whether inflation continues cooling enough to allow the ECB to ease its tightening stance.​

A Positive Outlook, But Challenges Persist

A recent survey conducted by Reuters found a consensus expectation that European markets will reach new record highs this year. The recent rally in major European indices has relied upon a narrow collection of stocks connected to the artificial intelligence (AI) sector. The analysts surveyed said they anticipated the ECB to cut interest rates by at least 100 basis points by the end of the year, suggesting reliance upon macroeconomic trends to support Eurozone sentiment. Ahead of key inflation figures later this week, the market is currently pricing in just 90 basis points of cuts for 2024, a significant shift from the 150 basis points expected just one month ago.

Unless key macroeconomic data shows an acceleration in the downward motion of inflation or a notable deterioration in economic conditions that would prompt the ECB to adopt a more dovish stance, major European indices may face headwinds should the market continue reducing expectations for interest rate cuts. Yields on Eurozone government bonds are at their highest in months, incentivising investors to remain out of the equity market despite indications that the regional economy is performing better than initially feared.​

Eurostocks 50 Eyes 5K?

The Eurotocks 50 index may see a short-term pullback as prices approach the upper channel trendline. However, considering the scale of the recent flag seen between 4500 and 4000, the ‘measured-move’ projects further potential up to 5000. If buyers fail to sustain the index above 4600, the likelihood of a reversal will increase, particularly if they lose 4380. This could return the focus to the lower channel trendline, with its breach lending some credence to a change in trend. Otherwise, moving past the round resistance could open to door to 5250 and 5500.

Source: SpreadEX / Eurostocks 50

Key Takeaways

The Eurostocks 50 has reached new 2000 highs due to growing investor confidence suggesting the region is past the most challenging aspects of the downturn. The index has risen 10% over five weeks as strong earnings from technology stocks pushed indexes higher, with Germany's DAX helping propel the broader Eurostocks 600 to a record high. However, unless key data shows a notable decline in inflation or deterioration in economic conditions that would prompt more dovish ECB policy, major European indices may face headwinds should expectations for interest rate cuts fall.​