(Bloomberg) -- European stocks are at risk of a pullback from a slowing economy, which would outweigh any lift from interest-rate cuts, according to Goldman Sachs Group Inc. strategists.
“Growth is what matters to Europe equities rather than cuts,” a team led by Lilia Peytavin wrote in a note, adding they remain cautious on stocks over a three-month period. “European equities’ performance is tracking a little ahead of the current PMIs, which makes them vulnerable to any further deterioration in activity.”
The euro area’s private-sector economy shrank for the first time since March, with a deepening manufacturing downturn heightening concerns that the region’s recovery has run out of steam. While Goldman Sachs economists don’t expect a recession in Europe, they anticipate a fairly muted recovery and below-trend growth in the second half of 2024.
Europe’s benchmark index has slipped this month amid concerns about China’s recovery and mixed signals on economic growth in the US and at home. A rebound for economically sensitive cyclical shares — fueled by optimism from Federal Reserve and European Central Bank rate cuts — is already on shaky ground amid faltering data.
Related: Cyclical Rebound Is Already Hitting a Growth Wall: Taking Stock
The equity market is “vulnerable to growth disappointment,” Peytavin concluded, advising investors to opt for defensives in the current climate. Her view mirrors that of JPMorgan Chase & Co., which sees the bond rally and negative earnings revisions undermining the investment case for cyclical stocks.
Goldman strategists have recently upgraded real estate and renewables, “two groups of stocks which are defensive but highly sensitive to interest rates, given their financial leverage.” Peytavin also has an overweight stance on banks, which generally outperform during rate-cutting cycles.
Still, Goldman is overweight equities over the next 12 months, on the expectation that recession will likely be avoided.
--With assistance from Michael Msika and Jan-Patrick Barnert.
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