Goldman Sees 20-25% Total Return for European Equities in 2015

For now on, « deflationary fears have receded », claims Goldman’s strategists. So far so good for European equities which shot up more than 13% YTD and still have steam to run up further, according to the bank.

One reason (among others) for optimism…

Source: Goldman Sachs

Source: Goldman Sachs

From their last « Strategy Matters » series:

« Rolling forward our index targets

We roll forward our index targets to 400/390/415 on the SXXP over 3, 6 and 12 months. For the SX5E we forecast 3700/3575/3900. On a 12-month basis, our forecasts remain strong, but we forecast a small dip between 3 and 6 months reflecting pricing of US rate risks as well as continued political risks in Europe, which have the potential to re-surface.

Earnings (ex-commodities) to improve

We revise our earnings growth estimates for 2015 and 2016 to 4% and 12% respectively, from 6% and 9% previously. The downward revision for 2015 entirely reflects an adjustment for commodity sectors; excl. those areas for which we slightly increase growth. Ex-commodities, we expect 11% EPS growth in 2015 compared with our previous forecast of 9% ex commodities.

Valuations have risen but the risk premium is still elevated

The SXXP P/E has risen to over 16x NTM; no longer cheap relative to history. However, earnings remain below the previous cycle and our macro model implies that the ERP should be 5.5% vs. 7.4% currently. Each 1ppt on the ERP adds c.20% to equities. We cannot, however, translate this move straight into a gain for the market; rising bonds yields are likely to provide some offset and we’d expect it to take time for the ERP to normalize.

Increase tilt toward cyclical consumer areas

We entered the year with a strong consumer cyclical tilt in our recommended
portfolio and underweights in consumer staples. See page 12 for changes. »

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