Continental Europe: stick to this being our joint top overweight.
We raise our year-end Euro Stoxx 50 target to 3,450 from 3,300 (and midyear target to 3,500 from 3,350). What is supportive?
* There has been significant capitulation.
* GDP growth of 2% should be consistent with c.15% outperformance.
* The stage of the cycle: Europe outperforms 70% of the time the bund yield rises and also outperforms when the global cycle turns up.
* Valuation: Europe’s 12-month forward P/E is on a 19% discount to the US, and a 17% discount on normalised earnings. The equity risk premium is still high, at 7.4%.
* Profits: earnings momentum in absolute and relative terms is at a 5-year high. We upgrade EPS growth to 8.5% for 2017 (from c.6%). Nearly half of consensus EPS growth is from financials and energy (where we have net upgrades in both). Rising inflation helps margins. Above all, the profit share of GDP remains close to trough levels.
* The ECB is likely to remain dovish until at least the aftermath of the French elections