Europe’s bull market still has legs

The pan-European Stoxx Europe 600 index has slipped from May's two-year peak in recent weeks. But investors "shouldn't be too nervous", says The Wall Street Journal's Richard Barley. There is scope for further gains.

The economic recovery is gradually gathering momentum, with the single-currency area set to expand by an "impressive" 0.7% in the second quarter alone, says Chris Williamson of IHS Markit. The composite PMI index, tracking both manufacturing and services, remains close to a six-year high. Eurozone exports, and the region's overall trade surplus, have reached new records. The continent is more exposed to the global economy than the US or Japan, so it will benefit most from the improving worldwide outlook. Germany's widely watched Ifo business confidence indicator has reached its highest level since 1991.

The economic rebound is looking self-sustaining. Erik Nielsen of UniCredit told the Financial Times that the first leg was driven by exports and now it's spreading to consumption and also, in some places, to investment. "The gradual reduction in domestic economic slack should lead to better pricing and higher profit margins for continental European corporations," says Christian Theis in a Barclays note. Stoxx 600 earnings are expected to climb by 18% in 2017. With Emmanuel Macron elected in France, Angela Merkel set to win in Germany this autumn and the risk of an early Italian election dwindling (it is more likely to happen in 2018 now), the populist revolt many feared has not materialised.

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Indeed, the political backdrop may be more auspicious in Europe than in the US for now, says David Rosenberg of Gluskin Sheff. Investors have given up on a Trump-induced fiscal stimulus anytime soon, whereas Macron at least intends to hit the ground running with his labour-market reforms. What's more, one of the eurozone's festering sores, the Italian banking system, is "finally" being addressed. Two insolvent lenders felled by bad loans have been forced to merge. Bondholders as well as equity investors had to take losses.

The European Central Bank has signalled that it is thinking about easing up on its quantitative-easing (money-printing) programme. Liquidity-addicted markets may wobble, but this probably won't happen until next year, while the prospect of higher interest rates bodes well for banks' profits, which in turn should help them keep lending. In short, tighter monetary policy "will create winners as well as losers". Take some profits on the US rally, says Rosenberg, and put the money in Europe.