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Euro Stocks Peak on Rate Cut Hopes, Goldman Sees Buyback Boom

European Stocks Hit Record Highs on Rate Cut Bets and Economic Optimism, Fueled by Cooling US Inflation.

By Athena Xu

5/16, 06:06 EDT

Key Takeaway

  • European stocks hit record highs, driven by US inflation cooling and Fed rate cut expectations, with Stoxx 600, DAX, and CAC 40 leading.
  • Investor sentiment buoyed by a "Goldilocks scenario" of slowing inflation and stable retail sales; Goldman Sachs projects a surge in share repurchases to $934 billion in 2024.
  • Anticipation of Federal Reserve rate cuts fuels market optimism, with equity indexes like S&P 500 and Nasdaq 100 also reaching new highs.

Record Highs Amid Economic Optimism

European stocks, including the Stoxx 600, DAX, and CAC 40, reached record highs on Wednesday, driven by cooling US inflation and retail sales data. This development has reinforced expectations that the Federal Reserve will cut interest rates. Despite a slight downturn in most benchmarks today, the overall sentiment remains positive. The combination of loose financial conditions, a recovering European economy, a bullish technical outlook, and a reassuring earnings season contribute to a favorable environment for stocks. Momentum indicators suggest a strong bullish trend, with only minor overbought signals appearing. The latest European Bank of America fund manager survey reveals a net 61% of respondents anticipate stronger European growth over the next 12 months, marking the highest optimism since July 2021.

Market Momentum and Investor Sentiment

The equity market's momentum is underscored by its 23rd record high close, with several factors supporting further gains. The decline in consumer prices for the first time in six months and stagnant retail sales in April have created a "Goldilocks scenario" for a potential soft landing, boosting investor confidence. Momentum indicators, including the Moving Average Convergence Divergence, Relative Strength Index, and slow stochastics, all signal an upward trend. Commodity Trading Advisors and the opening of the buyback window, with Goldman Sachs projecting a 13% surge in total share repurchases to $934 billion in 2024, further bolster the market. The VIX Index's drop to its lowest level of the year also diminishes fear among investors, encouraging long positions even at record stock levels.

Economic Data Fuels Rally

Recent US economic data has maintained a balance that favors the stock market rally. Mark Cudmore highlights the potential impact of restrictive monetary policy on the economy, as noted by the Fed’s Kashkari, suggesting that the consumer sector may be weakening. However, the current stance of holding interest rates steady is seen as beneficial for stocks. With traders re-leveraging into global stocks, it is challenging for Treasury yields and the dollar to rise. The anticipation of Federal Reserve rate cuts, with money markets almost fully pricing in two 25 basis point reductions by December and expectations of a more aggressive easing cycle, has fueled optimism. Equity indexes across the board, from the S&P 500 and Nasdaq 100 to Europe’s Stoxx 600, CAC 40, and DAX, have reached new highs, benefiting from the current economic dynamics.

Street Views

  • Strategists at Tier 1 Alpha (Bullish on European stocks):

    "The put/call skew remains low, and premiums only saw a modest jump, suggesting that overall hedging demand remains subdued."

  • Stephen Suttmeier, Bank of America (Bullish on the market's technical picture):

    "And the technical picture remains bullish."