European stocks poised for surge as ECB meeting nears

investmentnews.com:

A historic European Central Bank meeting this week may be the catalyst that drives regional equities to new peaks.

The ECB is expected on Thursday to start an interest-rate cutting cycle before the Federal Reserve for the first time ever, as inflation in the euro area cools faster than in the US. There’s also an improving outlook for corporate earnings, with Europe’s economic growth remaining resilient.

That’s leading asset managers and market strategists to say there’s room for the benchmark Stoxx Europe 600 Index to build on a record-hitting rally so far this year, even if the timing of the Fed’s rate cuts remains uncertain.

“All in all, it’s a pretty good combination for stocks,” said Lilia Peytavin, a portfolio strategist at Goldman Sachs Group Inc. in Paris. “What’s crucial on Thursday is the new growth and inflation outlook of the ECB. We’re expecting growth to rebound in the euro zone in the coming quarters, so that should be good” for so-called cyclical stocks.

History shows easing monetary policy bodes well for equities. Since the 1980s, European stocks have risen 2% in the month following a rate cut from the Fed, roughly twice the performance of equities in any given month, according to an analysis by Goldman Sachs. The rally over 12 months tends to be much stronger when the cuts are accompanied by a robust economy, the data showed.

Of course, the 8% gains this year already reflect some optimism. The euro zone has exited recession, with its four top economies driving speedier growth than expected. At the same time, traders have now fully priced in at least two rate cuts from the ECB in 2024.

While that limits the odds of a “big bounce” if the central bank does cut rates on Thursday, “the move won’t be